OECD Tax Audit Risks for Cross Border Intangible Layout Transfers
Cross-border transfers of physical layout files trigger high-risk OECD transfer pricing audits unless backed by contemporaneous DEMPE labor logs and arm's length valuation.
DEMPE Analysis
Meaning
Functional evaluation of the roles performed in the lifecycle of an intangible asset determines which entity earns the associated profits. Tax professionals perform a dempe analysis to identify who controls the development, enhancement, maintenance, protection, and exploitation of the design. The framework governs the allocation of intellectual property income and stops applying when the asset is fully commoditized or the functions are split between independent contractors.
Functional Assessment
Interviews with lead engineers and project managers reveal which entity actually makes the decisions regarding the radio architecture. A dempe analysis looks beyond legal contracts to find the personnel who manage the risks of the design process. If a subsidiary in one country performs all the maintenance work, it must be compensated accordingly regardless of who holds the patent.
Legal Ownership
Paperwork identifying the patent holder is only one part of the overall valuation. Conduct of the parties involved in the dempe analysis often carries more weight than the written agreement in a tax audit. Regulators want to see that the entity earning the profit has the technical capability to oversee the work.
Profit Attribution
Revenue from the sale of a smart module is distributed based on the value added during each phase of the project. Results of the dempe analysis dictate the royalty rates or service fees paid between the corporate divisions. This process ensures that tax is paid in the location where the actual value is created.