HTVI in Transfer Pricing

In an economy driven by innovation and intellectual property, transactions involving intellectual property are becoming increasingly risky, both from a legal and a tax perspective. Tax authorities are particularly concerned with internal transactions within international capital groups, as well as with transactions between related entities (transfer pricing issues), particularly involving the transfer of ownership and the licensing of so-called hard-to-value intangible assets (HTVI transactions).

Conflicting Perspectives: The Ex-Ante versus Ex-Post Challenge

The main challenge in HTVI transactions is the fundamental asymmetry of information and time horizon. Taxpayers make pricing decisions based on uncertain forecasts and assumptions about the distant future (ex-ante analysis covering a multi-year period). In turn, tax authorities evaluate the same taxpayers’ decisions several years later, already knowing the actual, historical financial results (ex-post analysis).

This conflict is codified in Polish regulations, specifically in §3 sec. 3, §7, and §8 sec. 2 of the Regulation of the Minister of Finance on Transfer Pricing, which grant tax authorities the right to use information about actual results to verify the price established in the past. This is particularly relevant when there is a significant discrepancy between the forecasted events and key market and financial parameters used to determine the transaction price, and the actual events and values of these parameters.

Analyzing the HTVI Definition – Polish and OECD Perspectives

The foundation for identifying tax risk is a clear understanding of the legal definition of HTVI. Both Polish regulations (Article 86a § 1 item 14 of the Tax Ordinance for the Reporting of Tax Arrangements (MDR) and § 2 item 22 of the Transfer Pricing Regulation) and the OECD Guidelines (paragraph 6.189) base the definition of HTVI on two crucial and concurrent premises:

• Lack of reliable comparative data during the transaction.
• High uncertainty in predictions of future cash flows or earnings.

These two pillars form the gateway through which the transaction enters the special HTVI regulatory regime. Analysis of these premises shows that they are closely connected. Factors that cause high forecast uncertainty, such as the asset’s novelty, early development stage, and unique commercialization model, are also the main reasons for the lack of reliable comparative data. 

In the case of breakthrough intellectual property, the second condition (high forecast uncertainty) almost automatically implies the first (lack of comparability). This means that, in practice, the discussion should not focus on whether an innovative asset is an HTVI, but rather on how to properly document uncertainty and structure the transaction to manage the inevitable ex-post verification. The legal risk does not lie in the classification itself but in the subsequent valuation and documentation.

Premise 1: “Lack of reliable comparative data”

The notion of a “lack of reliable comparable data” is broader than simply not finding a transaction in a commercial database. Under Polish rules and practices, this situation includes several different scenarios.

• Lack of market transactions: No comparable intangible asset transactions took place in economic activity.
• Lack of available information: Public information sources, both free and commercial, that could be accessed by unrelated entities, do not include data on such transactions.
• Failure of a reasonable search process: Despite conducting a thorough, commercially viable search, no reliable comparable data were identified.

It’s worth noting a subtle but essential difference in the wording used in Polish regulations. The Transfer Pricing Regulation addresses a situation in which “reliable comparables did not exist.” In contrast, the MDR provisions refer to intangible assets that “did not have a reliably determined comparable value.”

The latter wording can be interpreted as describing the actual circumstances: a comparable value was not determined, potentially lowering the evidentiary threshold for tax authorities. At the same time, Article 11c, Section 4 of the Corporate Income Tax Act states that difficulty in verifying prices or the absence of comparable data cannot be the only reason for an adjustment, which creates a certain legal tension for taxpayers.

The second premise concerns the high degree of uncertainty in financial forecasts. OECD Guidelines 6.190, reflected in Polish practice, provide a practical list of indicators that may indicate such uncertainty:

• Partially developed intangible assets: The asset remains in development at the time of transfer, and its final form and functionality are unknown (e.g., a drug patent in Phase II clinical trials, software in beta testing).
• Delayed commercialization: The commercial use of the intangible asset is not expected to happen for several years, which makes revenue forecasting much more difficult.
• Novel use: The intangible asset is intended to be utilized in an innovative way for which there is no documented market history or similar implementations, making forecasts very speculative.
• Integral relationship with another HTVI: The asset itself may not be an HTVI, but it is essential to the development or enhancement of another intangible asset that qualifies as an HTVI

A practical example demonstrating these features was included in the 2025 SCCT (Transfer Pricing Centre Association) workshop materials: the transfer of an organized part of an enterprise (OPE) containing an IP portfolio that still requires about 1.5 years of additional research and development before it reaches market readiness.

The Ex-Post Approach in Europe – A Comparative Study

Standard Framework: OECD Impact and the 20% Materiality Threshold

Although national tax laws vary in detail, they share a common foundation: the implementation of the OECD’s conceptual framework for HTVI. A key aspect of this approach is enabling tax authorities to use ex-post (actual) results as “presumptive evidence” of whether an ex-ante valuation is valid. Leading European jurisdictions have further clarified this general principle by establishing a specific quantitative materiality threshold of 20% for the difference between forecast and actual results.

The convergence of major European economies around the 20% materiality threshold effectively establishes a regional risk standard for HTVI transactions. This provides taxpayers with a clear, numerical benchmark while also establishing a “hard line” that is likely to automatically trigger a detailed review of the transaction during an audit.

For taxpayers, this means clarity about the rules, but also an “edge” risk: a 19% deviation might go unnoticed, while a 21% deviation will require significant resources to defend against. This compels taxpayers to adjust their approach to risk management – the goal is no longer to create a rational forecast, but to thoroughly test the model for the likelihood of exceeding the 20% threshold and to document this analysis at the time of the transaction.

The German model (Foreign Taxation Act 2022)

• Key Principles: Germany has established seven years for tax authorities to make retrospective price adjustments (reduced from ten years).
• 20% Rule: An adjustment is assumed to be necessary if the actual profit differs from the ex ante valuation by more than 20%. Below this threshold, the tax authority cannot enforce an adjustment.
• Taxpayer’s Defense: The taxpayer can rebut this presumption by demonstrating that the discrepancy resulted from unforeseen circumstances or that the initial valuation appropriately accounted for uncertainty (e.g., through advanced scenario analysis).

The Dutch Model (Transfer Pricing Decree 2022)

• Key Rules: The Netherlands also permits tax authorities to use actual results to contest ex ante pricing.
• 20% Rule: A “significant discrepancy” is clearly defined as a deviation exceeding 20% from the original forecasts.
• 5-Year Safe Harbor: Importantly, an intangible asset ceases to be treated as HTVI only if a significant discrepancy occurs more than 5 years after the date on which it first generated revenue from unrelated parties. This creates a time-limited risk window for taxpayers.

UK Model (HMRC Manual INTM440176)

• Key Principles: The UK Tax and Customs Office (HMRC) explicitly states that it may use ex-post results as “presumptive evidence” regarding the adequacy of an ex-ante price.
• 20% Rule: An exemption from the HTVI approach applies if the difference between forecasts and actual results does not result in a change in compensation exceeding 20%.
• Taxpayer Defense: UK regulations set out a detailed list of exemptions, including reliable ex-ante documentation, evidence of unforeseeable events, or an advance pricing agreement (APA).

American experiences

The “Commensurate with Income” (CWI) Standard: The Statutory Basis for the IRS’s Authority

The US approach is fundamentally more aggressive and different from the OECD model. The “commensurate with income” (CWI) standard, found in Section 482 of the Internal Revenue Code (IRC), is not merely a guideline but a legal requirement that income from the transfer of an intangible asset match the income it produces. This standard underpins the IRS’s authority to make “periodic adjustments” based on actual results. Recent IRS guidance (GLAM 2025-001) confirms that the CWI standard can even take precedence over the general arm’s length principle.

An analysis of key US court cases collectively reveals a specific “checklist” that courts use when evaluating HTVI valuations. First, is the asset narrowly and adequately defined (Amazon case)? Second, are the valuation assumptions realistic and supported by evidence (Veritas forfeiture)? Third, is the profit allocation consistent with legal ownership and economic substance (DEMPE analysis – Coca-Cola case)? Failing to meet any of these criteria presents significant legal risks. Taxpayers should therefore prepare their documentation to address these questions proactively.

Case Study 1: Amazon.com v. Commissioner – Defining the Scope of an Asset [1]

• Subject of the dispute: The main issue was the scope of valuation under the “buy-in” fee in the Cost Sharing Arrangement (CSA). The IRS requested a broad valuation of the entire European business, including “residual business assets” such as goodwill, going concern value, and Amazon’s “culture of innovation.” Amazon contended that only specific, identifiable, and independently transferable assets (website technology, trademarks, customer lists) were subject to valuation.
• Ruling: The Tax Court and the 9th Circuit Court of Appeals agreed with Amazon, ruling that under pre-2009 regulations, the definition of “intangible asset” was limited to assets that could be traded independently and did not include amorphous, inextricably linked attributes.
• Practical Implications: This case highlights a crucial rule: the first step in any HTVI analysis is to clearly and narrowly define the specific legal asset being transferred. Defining assets too broadly or using a company-wide valuation approach can put taxpayers at risk because it might accidentally include items that shouldn’t be considered. Nonetheless, the court noted that, given more recent regulations (post-2009) and the 2017 Tax Cuts and Jobs Act (TCJA), the IRS’s position is likely correct, indicating that the law in this area continues to evolve.

Case Study 2: Veritas Software Corp. v. Commissioner – Questioning Unrealistic Assumptions [2]

• Subject of the Dispute: The IRS challenged the “buy-in” fee paid by Veritas for the software, asserting a much higher valuation based on a perpetual useful life assumption and the “forgone profits” method. Veritas employed the Comparable Uncontrolled Transaction (CUT) method, relying on agreements with unrelated OEMs, and argued for a short, finite useful life for the software.
• Ruling: The Tax Court concluded that the IRS’s findings were “arbitrary, capricious, and unjustified.” Specifically, it rejected the assumption of a perpetual useful life for rapidly evolving software technology. It was determined that the taxpayer’s CUT method, based on actual market contracts, is the most reliable.
• Practical implications: The assumptions underlying the valuation are just as important as the model itself. Taxpayers must provide strong, industry-specific evidence supporting key assumptions, particularly the asset’s useful life and discount rate. Relying on vague assumptions or perpetual growth rates for technology assets is a risky strategy that courts have clearly rejected.

Case Study 3: The Coca-Cola Co. & Subsidiaries v. Commissioner – Primacy of Legal Property and DEMPE Analysis [3]

• Subject of the dispute: The IRS challenged Coca-Cola’s transfer pricing method, which allocated significant profits to foreign “supply points” in connection with its marketing activities. The IRS argued that the U.S. parent company was the sole legal owner of the valuable trademarks and brand and that the foreign entities only performed service functions.
• Ruling: The Tax Court upheld the IRS’s analysis based on the Comparable Profits Method (CPM). The court found that because TCCC (the U.S. parent company) legally owned key intangible assets and performed the essential DEMPE (Development, Enhancement, Maintenance, Protection, and Exploitation) functions, the foreign entities were not entitled to the high profits they reported. Their marketing expenses were viewed as contributing to the value of TCCC’s assets rather than to their own intangible assets.
• Practical implications: This ruling underscores that economic substance and legal ownership are more important than contractual form. The DEMPE analysis is not just theoretical; it’s crucial for deciding which entity rightfully earns the profits from intangible assets. Financing an activity (e.g., marketing) does not, by itself, confer economic ownership of the resulting value.

Case Study 4: Medtronic, Inc. v. Commissioner – A Cautionary Tale of Litigation Risks [4]

• Subject of the dispute: A complex case involving royalty rates paid by Medtronic’s Puerto Rican subsidiary for intangible assets related to medical devices. Medtronic supported the CUT method, while the IRS used the CPM method.
• Ruling: In a highly unusual decision, the Tax Court rejected both parties’ methods as flawed. It was determined that the taxpayer’s CUT method needed too many adjustments to be dependable, and the IRS’s CPM method was arbitrary. The court then devised its own “unspecified method” to set the royalty rate. This ruling was appealed and sent back for further review.
• Practical Lessons: Litigation is inherently unpredictable. Even with expert assistance and extensive analysis, a court may reject all proposed methodologies and impose its own solution. This underscores the importance of resolving disputes at the review or appeal stage and the need for a thorough, multifaceted approach to valuation that withstands rigorous judicial scrutiny.

Analysis of international regulations and case law indicates that effective risk management of HTVI demands a proactive and systematic approach.

It is essential not only to prepare a reliable ex ante valuation but also to develop robust documentation that withstands ex post verification.

The practical aspects of developing such a strategy, including a discussion of the DEMPE functional analysis, selecting appropriate valuation methods, creating a “defense file,” and implementing monitoring processes, were covered during a workshop led by me and attorney Marcin Misiaszek (co-author of the content presented in this article – https://misiaszek.eu/), as part of the 10th Transfer Pricing Center Conference organized by the Transfer Pricing Center Association in September 2025.

During the workshop, we introduced a five-step tax risk mitigation model based on the framework presented in the source material.

Steps 1 and 2 (Pre-qualification and functional analysis / DEMPE)

• Action: Perform a thorough analysis to define the transaction accurately.
• Amazon’s conclusion: Clearly identify specific, independently transferable intangible assets. Documentation must explicitly state what is not being transferred (e.g., residual goodwill, employees) to prevent challenges to the valuation on the basis of the entire enterprise’s value.
• Coca-Cola’s conclusion: The DEMPE analysis must be grounded in fact and accurately reflect the parties’ actual activities. It is essential to identify who truly controls the development, improvement, maintenance, protection, and use functions. This analysis will determine the rightful recipient of income from intangible assets.

Step 3 (Verification and Selection of Valuation Methods)

• Action: Develop a comprehensive, well-supported valuation.
• Veritas conclusion: Avoid perpetual life assumptions for assets in dynamic industries. Use market evidence, like third-party contracts—even if not perfectly comparable—to support assumptions. Please explain why the chosen discount and growth rates are suitable for the specific asset and its risk profile.
• European practice conclusion: Scenarios and stress tests should be included in the analysis. Given the 20% materiality threshold, the valuation should yield a range of possible outcomes, with documented probabilities for each scenario. This indicates that uncertainty has been accounted for in advance.

Step 4 (HTVI Transaction Documentation)

• Documentation must be prepared at the time of transaction execution, not during the audit. It should clearly identify the transaction as HTVI and include a detailed explanation of why.
• It must include all the elements discussed: a clear definition of the asset, a comprehensive DEMPE analysis, a detailed valuation model supporting all assumptions, a scenario analysis, and a rationale for the chosen payment structure (e.g., a one-time fee, royalties, or milestone payments).
• Consider adding price adjustment or renegotiation clauses to the agreement to reflect market behavior under uncertain conditions.

Step 5 (Monitoring – Updating Transaction Terms)

• Action: Develop a process for monitoring actual performance against ex ante forecasts.
• This is essential for applying European safe harbors (such as the 5-year rule in the Netherlands) and for defending against the “presumptive evidence” approach in the UK or the CWI standard in the US.
• The monitoring process should identify significant deviations and initiate a predefined review to analyze their causes, such as whether they resulted from an unforeseen market event or an incorrect initial assumption. This proactive management approach is much more credible than reactive explanations given during an audit.

Conclusion: Key Elements of HTVI Risk Management

An analysis of international regulations and case law yields five key principles for proactively managing legal risks associated with HTVI transactions.

1. The definition is purpose: A clear definition of the transferred asset forms the basis of any defense. Avoid broad, vague descriptions that could be interpreted as a transfer of the entire enterprise.
2. Assumptions are critical: Every key assumption in the valuation model (life expectancy, discount rate, growth forecasts) must be supported by solid, industry-specific evidence.
3. DEMPE determines the financial flow: Profit follows economic substance, not merely contractual terms. A comprehensive DEMPE analysis is essential for justifying income allocation.
4. Maintain a proactive approach: The most vigorous defense is prepared before the transaction is completed, not after receiving a notice of inspection. A thorough and accurate “defense file” is crucial.
5. Understand your jurisdiction: The regulations in the US, Germany, the Netherlands, and Poland vary. The risk management approach must account for the legal specifics of each jurisdiction involved.

Sources:

1. https://cdn.ca9.uscourts.gov/datastore/opinions/2019/08/16/17-72922.pdf
2. https://www.cfo.com/news/veritas-scores-a-major-transfer-pricing-victory/669550/
3. https://ir.law.utk.edu/cgi/viewcontent.cgi?article=1647&context=transactions
4. https://ecf.ca8.uscourts.gov/opndir/18/08/171866P.pdf

In upcoming articles, I will explore this topic from the practical side of valuation and transaction pricing in HTVI trading. See case study HTVI Transaction Analysis

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