An international, publicly traded group with global headquarters in the Canton of Zurich is engaged in the development and marketing of innovative software solutions. Various market analyses indicate that the group’s key value drivers are the Finexus software platform1 (“Platform”) and the underlying technology design2 (“Technology”).
The Finexus financial analysis software platform provides an infrastructure on which various applications and tools can be developed, integrated, and operated. It enables companies to access a powerful, cloud-based solution that meets their specific needs in areas such as data analysis, financial management, or corporate governance.
The Platform is the foundation for delivering software solutions to customers and offers a range of features and services that are critical for processing and visualizing large volumes of data. The main product is a platform that helps companies monitor and analyze their finances in real time. The platform provides the infrastructure, security protocols, and tools needed to process data. The technology encompasses the user interfaces (UI/UX) as well as the underlying algorithm that analyzes and visualizes data.
The technology is continuously being developed to meet the changing needs of customers and to improve the platform’s functionalities.
The Group’s operational business is structured as follows from a legal and business perspective:
- XYZ AG, headquartered in Zurich (the parent company and Group headquarters), is responsible for the legal protection of the Finexus platform and its design in the various markets (including the renewal of local patents and the defense against unauthorized use), the strategic development of the platform, and the development and coordination of global marketing campaigns. While the marketing department (“global marketing”) is based at XYZ AG in Zurich, the legal department responsible for the global protection of the software platform and the design ("Legal Department") was spun off to the wholly-owned subsidiary XYZ Management AG, headquartered in Zug, which is compensated by XYZ AG for this on the basis of the transactional net margin method with a net cost plus of 5% (Transactional Net Margin Method with Net Cost Plus, or "NCP" for short, as the Profit Level Indicator). The Group’s research and development department at XYZ AG is also responsible for the further development of the software platform (R&D).
- The formal owner of the intellectual property rights to the Finexus software platform and the design in the various countries is XYZ IP Ltd., based in Luxembourg. This company owns the technology algorithms for providing the software, which is resold to independent licensees and end customers. XYZ IP Ltd. pays all fees for the registration and renewal of global trademark and intellectual property rights, which are initiated by XYZ AG and carried out by XYZ Management AG on behalf of XYZ IP Ltd. XYZ IP Ltd. compensates XYZ AG for this based on the NCP with a 5% surcharge. It also compensates XYZ AG for the development and coordination of global marketing campaigns as well as research and development activities, likewise based on the NCP with an 8% surcharge in accordance with a benchmarking study. In return, ABC IP Ltd. charges the Group’s technology companies a license fee based on short, written contracts. According to the wording of the contracts, the subject matter of the license is “various IP rights necessary for the business.”
- XYZ Production BV in the Netherlands, as well as other regional technology companies, are responsible for the technical development and adaptation of specific software products based on the designs and algorithms of XYZ AG (production). They ensure that the software is available in the various markets and functions in accordance with global standards.
- The software products are sold by the respective technology companies to independent license partners. These license partners purchase the software and receive the exclusive right to distribute the software in their respective markets (distribution license). In Austria, the independent XYZ Lizenzpartner AG is responsible for this, sourcing the software from XYZ Production BV in the Netherlands. The purchase price for the software covers the exclusive right of use, so no separate license fees are charged for sales to end customers.
- The license partners sell the software products to end customers, such as businesses or individual consumers, and may offer additional services such as training, implementation, and technical support. These partners are responsible for distributing the software in their respective markets and providing the solution to their customers. The license partners are thus distributors who resell the software products in various markets but are not permitted to make their own changes or modifications to the code. They are responsible for the distribution and sale of the software to end customers, while the technology companies manage the development, further development, and global market launch of the software products.
- In the individual sales markets, the Group has local subsidiaries, including XYZ (Austria) AG. These subsidiaries are responsible for country-specific marketing, which is implemented within the framework of the global guidelines set by XYZ AG (e.g., global marketing campaigns adapted to the respective countries). In addition, the country subsidiaries serve as points of contact for the independent licensing partners, who are responsible for the provision and distribution of the software solutions.
- The country subsidiaries are also compensated by XYZ IP Ltd. based on a benchmarking study, using the NCP and an 8% markup. This compensation covers the costs of local marketing as well as support for the implementation of global campaigns tailored to the needs of local markets.
1. Facts
See basic facts.
Questions
- How do the OECD Transfer Pricing Guidelines define the term “intangible assets,” and which ones are involved in this case?
- Since the BEPS project—even though these terms are not explicitly mentioned in the OECD Transfer Pricing Guidelines—the OECD distinguishes between “legal,” “financial,” and “functional” ownership of intangible assets. What do these terms mean, and what are the transfer pricing implications?
- To which group company or companies should the following intangible assets be allocated for transfer pricing purposes:
- Brand;
- Finexus software platform;
- Technology (including algorithms and databases);
- Production know-how;
- Sales rights;
- Customer relationships?
4. What is the significance of intra-group agreements regarding the transfer pricing allocation of the software platform, the technology design, and the brand?
5. Can the parent company XYZ AG charge its subsidiaries compensation “in principle” for the use of the “Finexus” brand in their business operations (e.g., in the company name)?
6. How is the fact that marketing activities are carried out by XYZ AG, but legal activities by XYZ Management AG, taken into account for transfer pricing purposes?
1. Facts
See basic facts. Assumption that the license payments are effectively paid to ABC IP Ltd. for transfer pricing purposes.
Question
- What methods could be used to determine the license payments from the technology companies to XYZ IP Ltd.?
1. Facts
As part of an intra-group reorganization, the Finexus Group plans to sell its intangible assets (Finexus software platform, technology) together with global marketing and R&D to the newly founded company XYZ Development Ltd. in the United Kingdom. The legal department remains in Switzerland. Since legal ownership of the brand, platform, and technology lies with XYZ IP Ltd., both XYZ AG and XYZ IP Ltd. act as sellers.
Questions
- What methods do the OECD Transfer Pricing Guidelines provide for determining the intra-group purchase price?
- Which company is the seller from the perspective of the Transfer Pricing Guidelines?
1. Facts3
The CraneX Global Group is a leading multinational company in the construction crane industry. The company develops and manufactures hybrid cranes that combine innovative technologies and high-quality design. This case study analyzes the application of the Transactional Profit Split Method (TPSM or PSM) as well as the transfer pricing challenges associated with high-value-in-treatment intangible assets (HTVI). The focus is on the two main companies of the CraneX Group:
- SwissCrane AG (OEM A, Switzerland): Specializes in mobile construction cranes.
- USCrane Inc (OEM B, USA): Leading supplier of tower cranes.
The CraneX Global Group consists of two Original Equipment Manufacturers (OEMs) that develop and produce hybrid cranes. These cranes combine:
- Mobility through the technology of SwissCrane AG.
- Load stability through the expertise of USCrane Inc.
The following intangible assets are central:
- Patents: Protection of innovative mechanical and technological solutions.
- Software: Control systems for optimizing mobility and stability.
- “CraneX” brand: A guarantee of quality and innovation.
- Production expertise: Efficient processes and high quality standards.
A control system for hybrid cranes newly developed within the group is considered a difficult-to-value intangible asset (HTVI). The technology promises significant market advantages, but future sales and profits are difficult to predict. Risks such as technological obsolescence and market acceptance significantly influence the value.
The CraneX Global Group’s value chain can be summarized as follows:
- Raw material procurement: Parts from third-party and sister companies.
- Production: SwissCrane AG assembles base components; USCrane Inc. integrates modules.
- Manufacturing: SwissCrane AG completes the hybrid cranes.
- Sales: Direct sales or through affiliated dealers.
The multinational company has prepared the income statement shown in Table 1 for the new hybrid crane product line (based on management estimates):
Questions
- Why is the transactional profit split method (TPSM or PSM) an appropriate transfer pricing method in this case?
- Based on the information in Table 1, determine the routine profit from production (comparable third-party manufacturers without such innovative IP technology achieve a market-standard return on production costs between 8% and 12%, with a median of 10%) and the allocation of the residual profit from R&D.
- What risks do the OEMs bear, and how are these accounted for in the PSM?
- Define HTVI. The CraneX Global Group decides to sell the IP related to the innovative control technology, which is still in an early stage of development. How can uncertainties in the valuation of the corresponding HTVI be taken into account?
- What other alternatives for utilizing the CraneX Global Group’s intangible assets, particularly the HTVI, could be considered, aside from joint commercialization by OEMs A and B or a sale of the IP?
- Is the OECD’s HTVI approach also applied in Switzerland?
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1 A software platform is a collection of software components or systems that provides a foundation on which other applications, tools, or services can be developed and operated. It enables developers to build upon it, extend it, or integrate their own software solutions.
2 The term “technology design” refers to the technical and functional designs or architecture of technology products or solutions.
3 This case study is based on the article by Stähli Lukas, “The Use of the Profit Split Method in Highly Integrated Transactions,” International Transfer Pricing Journal (ITPJ), July/August 2018, 280 ff.
