An Indian tax appellate tribunal has recently ruled on the issue of marketing intangibles in a transfer pricing case involving the Indian manufacturing and sales subsidiary of the Korea-based LG Electronics Inc. In that case, the Indian authorities alleged the subsidiary incurred excessive marketing expenses relative to comparable companies and the excess amount should be treated as brand promotion on behalf of the parent, entitling the subsidiary to compensation for these expenses and a mark-up. The tribunal endorsed this approach in principle while referring this particular matter back for redetermination on technical grounds.
Marketing intangibles are also a key areas of focus for the Canada Revenue Agency in transfer pricing audits.
In our experience, the CRA often alleges that routine marketing expenses in the local jurisdiction incurred by a Canadian manufacturer or distributor in a multi-national group, in fact, enhance the brand and thereby give rise to a valuable marketing intangible on the part of the Canadian entity that entitle it to a premium return and/or disallowance of a royalty expense. Such reassessments can give rise to material double taxation requiring redress through the Canadian courts or under the competent authority procedures of an applicable double tax treaty if the matter cannot be successfully resolved with CRA.
Although these proceedings may ultimately vindicate the taxpayer’s position, they can be costly and time-consuming. It is important that the Canadian entity’s contemporaneous documentation be drafted with CRA’s audit posture in mind; be comprehensive, including not only a transfer pricing study but also appropriate licensing and other legal agreements; and, that it be updated regularly to ensure it remains current.