The Austrian Tax Authority Vigorously Focuses on Marketing Intangibles
In times of decreasing tax revenue, tax administrations seek for the means to raise the same. Amongst others, Marketing Intangibles became a favorite source for tax administrations, as there are no clear guidelines on the scope of a Marketing Intangible and foremost, whether there even is a Marketing Intangible. Therefore, whenever this subject arises, intensive discussions with the tax administrations are pre-programmed.
1. OECD Position on Marketing Intangibles
Is it the general understanding, that Marketing Intangibles may be created, where a distributor that does not own the trademark, or has benefial ownership, to certain products that incur certain marketing expenditures. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD Guidelines”) assert in para 6.38 that where a distributor bears extraordinary or non routine costs beyond comparable distributors (i.e. costs above the “bright line test”), the distributor could obtain an additional return through a decrease in the purchase price of the product or a reduced royalty rate. Further, the OECD Report on the Attribution of Profits to Permanent Establishments also addresses this issue and applies the significant people functions concept. Accordingly, functions such as the creation and control over branding strategies, trademark and trade name protections, and maintenance of established intangibles as well as the identity of the party who incurs these costs are viewed decisive to determine who “owns” the intangible. Lastly, the new Chapter IX to the OECD Guidelines discusses marketing intangibles if a full-fledged distributor converts into a limited risk distributor. In these instances it is important to determine the nature and value of any local Marketing Intangibles the distributor has developed and transferred to an affiliate, and what should have been the arm’s length compensation.
2. International Court Cases and other Domestic Guidelines
Many courts all around the world have addressed Marketing Intangibles. In the US, the 1998 DHL(1) decision, which was reversed in part by the Ninth Circuit in 2002, was considered a landmark decision introducing the terms non routine versus routine expenses which has been referred to as the “bright line test”. A similar court case can be found in Germany in the Aquavit(2) case, where the court denied the business expense relating to the underlying marketing expenses instead of determining a Marketing Intangible. The most recent case is the Maruti Suzuki(3) decision in India, where the Delhi High Court applied the concept of Marketing Intangibles and the “bright line” test, albeit in a wrong way. The decision was eventually set aside by the Indian Supreme Court and referred back to the tax authorities.
Apart from the court cases, the concept of Marketing Intangibles has also found its way into tax administrations’ guidelines. The US Treasury Regulations 2009 on Section 1.482 provide that related parties that develop or enhance the value of intangible property owned by another related party are entitled to arm’s length compensation for their contributions. The German Transfer Pricing Guidelines address this issue and so has the Australian Taxation Office that issued guidance on Marketing Intangibles.
Thus, the Marketing Intangibles concept is recognized in many countries.
3. The Austrian Response
The Austrian tax authorities and the Ministry of Finance have recognized the issue, but clear guidance is missing. The Austrian Ministry of Finance refers in its domestic Transfer Pricing Guidelines published in 2010 (“TP Guidelines”) to the Authorized OECD Approach (“AOA”) concerning the attribution of profits to permanent establishments (“PE”) and attribute income according to the significant people functions. As a result, the Austrian tax authorities conclude that if an Austrian PE helps to penetrate and build the Austrian market by implementing marketing strategies, the good will created thereby has to be shared between the PE and the head office. In these cases, the PE’s functional profile is that of an entrepreneur and therefore, it has to receive a return on sales. It may not simply be compensated for the marketing costs as a cost plus method would only be justified if the PE qualified as service provider. According to the tax authorities, the AOA is not limited to PEs, but can be applied in any transfer pricing context. This is pretty much the extent of the Ministerial guidance on this issue.
Members of the Austrian tax authorities that also belong to the team of transfer pricing auditors have published their opinion in various publications. Not surprisingly, they follow the TP Guidelines and always come to the conclusion that Marketing Intangibles were created where marketing expenses were borne by an Austrian company that go beyond the routine marketing spent of a distributor. Emphasis is placed on the functional profile of the Austrian entity and therefore, on whether it acted as entrepreneur or as service provider. However, what these publications are almost always lacking is the definition of what is a routine or non routine spent. It was simply assumed that an ordinary distributor would not have borne certain expenses, without giving an explanation for this assumption. Further, the question of how much of a successful market penetration is in fact derived from the activities of the Austrian distributor and how much is attributable to the specifics of the product developed abroad or potential international marketing activities in countries other than Austria is only touched slightly. To answer this question reference is made to comprehensive market research studies that have been established by the tax payer.
As a result, the Austrian tax authorities do not provide clear guidance on the issue of Marketing Intangibles. They raise the general issue without addressing the crucial factors that must be examined. It can therefore, be assumed that where the local distributor bears a relatively high amount of marketing spent, the Austrian tax authorities will address this issue in the course of an audit. It will then be a burdensome task to evidence that there were no Marketing Intangibles created or that their value is below the tax authorities’ assessment.
Therefore, it is imperative for the tax payer to address this issue upfront when entering the Austrian market or introducing a new product. It would be imprudent to plan on taking care of it at a later stage, as tax authorities will not accept a retroactively paid compensation if the functional profile of the Austrian company suggests that it had been acting as entrepreneur rather than as service provider. Accordingly, careful planning is needed and simple measures, such as introducing separate expense accounts in the domestic bookkeeping system and adjusting the functional profile of the Austrian entity, can help.
Imke Gerdes has been with Baker & McKenzie Diwok Hermann Petsche since 2003 and is highly experienced in tax law. Ms. Gerdes is one of the few Austrian lawyers qualified as a lawyer and tax advisor ("Steuerberater"). She is a member of the firm’s European Transfer Pricing Practice Group, currently serves on the Steering Committee of the Firm’s Wealth Management Practice Group, and is the Vice President of the Austrian branch of the Society of Trust and Estate Practitioners (STEP). Ms. Gerdes is a member of the International Fiscal Association, the German and Austrian Bar Association, the Austrian Chamber for Tax Advisors, as well as of STEP. Imke can be contacted at Imke.Gerdes@bakermckenzie.com or on + 43 1 24 250 468.
(1) DHL Corp. Et al v. Comm’r, T.C. Memo. 1998-461
(2) BFH 17.2.1993 (I R 3/92, BStBl II 1993, 457)
(3) ‘Maruti’ Suzuki India Ltd v. Additional Commissioner of Income Tax Transfer Pricing Officer of New Delhi, WP© 6876/2008 (High Court of Delhi at New Delhi, 2010)