Know-how Dispute in case Transfer Pricing of Taxation

By: Hepi Cahyadi, employee of Directorate General of Taxes

The definition of "know-how" based on the Organization for Economic Cooperation and Development (OECD) is a process, formula, or confidential information related to experience in industry, trade, or science that can generate economic benefits for the company and has not been patented. In paragraph 6.5 of the OECD Transfer Pricing Guidelines (2010), citing paragraph 11 of the 2008 OECD Commentary on Article 12, it is stated that know-how generally relates to confidential industrial, commercial, or scientific information arising from previous experience, which is practically applied to business operations. company and generate an economic benefit.

In terms of tax planning, know-how is an entry point for taxpayers to increase costs in order to reduce profits. Multinational companies (parent companies) usually charge know-how fees to their related parties in Indonesia. The practice of base erosion profit shifting through a know-how scheme tends to make it difficult for tax officials to prove their existence. However, the tax officer can prove the economic benefits of the know-how through the function, asset, and risk (FAR) assessment method of the intergroup company.

In a case study, the author found that the burden of know-how should not be charged as a cost. Company A. Ltd., domiciled in America, has a subsidiary in Indonesia under the name PT B. This company is engaged in the car tire industry. A. Ltd., as a parent company, supplies raw material in the form of raw rubber latex from abroad and is sent to Indonesia by PT B. It is then processed into finished rubber, which is ready to be used as raw material for car tires. However, the rubber processing process is manipulated by PT B to PT C. The processed rubber products are marketed to PT D as an international brand car tire company. Among A. Ltd., PT B, PT C, and PT D are group companies.

PT B's imposition of know-how fees on A. Ltd. for reasons of secret rubber processing receipts is something odd because PT C already has knowledge of rubber processing obtained from A. Ltd. as a group company. In FAR analysis, PT B has a low level of inclination. PT B does not have a factory or machine that processes finished rubber because the processing is carried out by PT C. PT B also does not bear the financial risk of ordering rubber overseas because the risk is fully borne by A. Ltd. as the parent company. In terms of assets, PT B also cannot prove that he has adequate machinery and office assets as a company. So that the FAR assessment is not fulfilled as a manufacturing company to charge know-how costs to A. Ltd.

Ways to identify the existence of manufacturing intangibles include: ensuring the existence of the know-how used in the factory and the economic benefits of that know-how. In other words, can the company produce these goods without using the formula or recipe from the know-how? Provide evidence that the transfer of the know-how does indeed occur between affiliates as licensors and other affiliates as licensees. Proof that the transfer of know-how has indeed occurred can be seen through which medium the know-how is transferred. example: know-how in the form of a secret formula sent by affiliates through various agreed media. Another example is that affiliates provide training modules related to the application of a particular technology.

The characteristic of know-how is that the information is confidential and not known to the public. So, if you browse the information received by affiliated companies and find that information is in cyberspace, then the information is no longer confidential and is for public consumption. Thus, the information is not known as know-how but is classified as information that is already known to the public. The difference between intangible assets in the form of royalties paid for the use of know-how and technical services must also be made by the provisions of the applicable Double Taxation Avoidance Agreement (P3B/tax treaty). The most important difference between royalties on know-how and technical services is that in technical services, the person or company providing the service is actively involved in the service, while in royalties on know-how, the person or company providing the service is not directly involved.

Tax disputes related to royalties include those related to commercial intangibles on know-how and generally that taxpayer royalty payments to affiliates cannot be used as expenses because the existence of intangible assets is doubtful. If the royalty fee is related to the terminology of intangible property or intangible property (IP), then to find out the prevalence and fairness of payment, the tax officer can conduct a test to prove its existence. The tax officer must be able to prove the existence of IP, which includes the types or types, ownership, assessment of IP, and the existence or existence of the transfer of IP usage rights. In addition to the fairness of the value of IP payment transactions, in this second stage, when determining the fairness of the value of IP, a comparability analysis must first be carried out. Based on the results of the comparison analysis, comparison transactions are sought that are comparable to the company's affiliated transactions, and then the transfer pricing method used is determined.

Conclusion :

1. Taxpayers may charge know-how fees as long as the processing provides economic benefits.

2. To fix the costs of technology, the tax authorities can use the Function, Assets, and Risk (FAR) method to look at whether or not the technology exists.

3. Know-how costs can be a mode of base erosion profit shifting (BEPS) for multinational companies.

*)This article is the author's personal opinion.