Transfer pricing and international tax in a digital economy: Key risks and opportunities

The digital economy is reshaping how businesses create and develop intangible assets and intellectual property.

Transfer pricing and international tax in a digital economy: Key risks and opportunities

The digital economy is reshaping how businesses create and develop intangible assets and intellectual property (IP). These assets are becoming a key value driver for many multinational groups (MNGs), and this creates a whole host of transfer pricing and tax risks.

For MNGs, understanding and managing these risks, along with maximising any tax-efficiency opportunities, is key in an ever-evolving landscape.

The rise of intangible assets

In the digital era, value is increasingly driven by intangible assets and IP such as software, algorithms, data trademarks, patents and platform technology.

Unlike physical goods, these assets are mobile, often hard to value, and ever-increasingly developed collaboratively cross border. This creates specific challenges for taxpayers and tax authorities, including:

Complex technical analysis: One of the key aspects of the transfer pricing analysis in respect of intangible assets and IP centres around the DEMPE functions (being Development, Enhancement, Maintenance, Protection & Exploitation) of the asset in question. It is common for MNGs to require a deep-dive into such an analysis, concluding on which parties have the ability to assume the economically significant risks across all aspects of the IP (along with the ability to fund any development costs).
Global mobility of key staff: In the post COVID-19 world, it is common for intangible assets and IP to be developed by more than one team, with contributions from multiple territories. Understanding how this cross-border development ties into the value creation activities across the group, and the DEMPE functions mentioned above, is an ever-important step in ensuring that any transfer pricing policies remains robust, supportable and fit for purpose.
Increasing area of focus: Given the role that intangible assets and IP can often play in the value chain, this area has become an ever-increasing focus for all stakeholders – particularly external stakeholders, including tax authority challenge, rigorous review by external auditors, along with being a key area of focus on any due diligence process – when selling intangible assets or companies holding/exploiting such assets. The tax risks of not having a robust transfer pricing policy (particularly around IP and intangible assets) can result in material tax exposures in several territories and commercial complications during sales processes.

Strategic considerations

We have included below several areas that MNGs can focus on to ensure that any transfer pricing operating model relating to intangible assets and IP remains robust, manages the tax risk effectively, but also allows any tax efficiency opportunities to be identified and maximised:

Proactive, front-foot planning: Having a tax and transfer pricing function that is embedded within the wider business is key to ensuring that tax is adding value to the commercial operations – as opposed to being treated as a back-office function. Having strong commercial links into the wider business can be very effective in managing tax risks before they become real-world risks that need retrospective management or action. This also allows a group to manage its transfer pricing risk in real time, so that any policies can be considered as the business operations evolve.
Holistic approach: Clearly there are always commercial drivers that ultimately lead to decisions around staff employment locations, funding of intangible asset development, and ownership of the resulting asset. These might include the location of a skilled workforce, the cost of that workforce and the geographic location of the funding market. Having transfer pricing and tax at the table for the planning stage helps to ensure that a group understands what incentives might be available in each territory and what this means from a cash-tax perspective. It also helps to ensure that any key material tax risks are known and understood upfront – particularly as different territories operate different tax regimes.
Real time monitoring: Strong tax governance, controls and process should allow an MNG to effectively manage any associated tax risks as business operations with respect to IP evolve. This is key when value-added functions and activities start to be undertaken in new territories or across multiple territories. It also ensures that any transfer pricing policies are considered and evolved alongside the operational substance of the MNG.
Managing tax authority challenge: MNGs may also consider a proactive strategy towards managing potential tax risks across its global footprint, particularly whether assessing the suitability (and availability) of Advanced Pricing Agreements (APAs) where relevant.

With careful planning, businesses can align IP structures with commercial reality, manage risks, and benefit from innovation incentives.

Digital services taxation: A shifting landscape

As digital businesses often generate significant revenues from users in countries where they have little or no physical presence, many jurisdictions have introduced Digital Services Taxes (DSTs) or are implementing new nexus rules under the OECD’s BEPS 2.0 initiative:

DSTs: These unilateral taxes target revenues from online advertising, digital marketplaces, and user data. They add a layer of complexity to transfer pricing, as they may not be creditable against corporate income tax.
Pillar 1 and Pillar 2: The OECD’s reforms aim to reallocate taxing rights and introduce a global minimum tax, impacting how digital profits are shared and taxed globally.
Compliance burden: Multinationals must monitor evolving rules, adapt transfer pricing policies, and ensure consistent reporting across jurisdictions.

Key actions for multinational groups

Undertaking full and thorough transfer pricing analysis: Ensuring that a full analysis of all aspects of any intangible assets and IP is undertaken that aligns with the operational substance of the group – including a deep dive in the DEMPE functions.
Real time monitoring: Having transfer pricing and tax maintain strong links in to the commercial aspects of the group to be able to manage any associated risk in real time, and as the business operations evolve.
Holistic & pragmatic approach to major changes: Bringing a holistic approach to intangible asset and IP planning can often to lead to an operating model that maximises incentives, but that also ensures a robust operating model that can withstand external stakeholder challenge.
Engage with experts: Seek advice on structuring, valuation, and compliance to mitigate risks and seize opportunities.

Transfer pricing in the digital economy is both a challenge and an opportunity. By proactively addressing the risks around intangible assets, IP, and digital services taxation, businesses can not only ensure compliance but also unlock value and support sustainable growth in a rapidly changing world.