Transfer Pricing and the Pharmaceutical Industry: Finding a Coherent Approach to Valuing Difficult-to-Value Intangible Assets

The pharmaceutical industry relies heavily on intangible assets to drive their economic returns. As pharmaceutical companies have become increasingly global, with complex supply chains across multiple countries it has led to challenges for tax authorities and practitioners in the context of transfer pricing. The Organisation for Economic Development (OECD) introduced their latest set of guidelines in 2017 which sets out the categorisation of difficult-to-value intangible assets. There is considerable evidence in previous literature to the complexity surrounding such intangible assets and incoherent approaches to valuing them, together with a lack of guidance from the OECD transfer pricing guidelines. The purpose of this research is to seek further clarity on what is the most utilised method of valuing a difficult-to-value intangible asset, how best to value trade secrets given the lack of comparable unrelated transactions, the preferred method of the OECD, and to determine whether transfer pricing practitioners have found the OECD transfer pricing guidelines to be pragmatic and useful. The research finds that an income approach valuation methodology is the favoured method by transfer pricing practitioners with some dispute as to which method is the most favourable, the profit split or discounted cashflow method. The research further finds that due to a lack of comparable unrelated transactions, the most utilised method for valuing trade secrets is the discounted cashflow methodology. Both methodologies were favoured by transfer pricing practitioners due to their reliability and reduction of subjectivity inherent in their calculations. Finally, this research shows that transfer pricing practitioners are in favour of the OECD transfer pricing guidelines, however with some suggestions for enhancement. Further gaps within the literature and current research have been identified to provide recommendations for further research