OECD Intangibles: DEMPE, HTVI and Cost Contribution

Chapter 5 of the OECD Guidelines is the intangibles chapter: how ownership of an intangible is attributed, how the contributions are measured, and how the profit attributable to the intangible is allocated. It is the modern answer to the question “who owns the intangibles, and who gets the profit?”, and its most-cited anchor — 5.7-5.12, the DEMPE functions — is the provision cited whenever ownership, and therefore the profit, is in question.

The chapter at a glance

Subject	What it covers
Intangibles in general	Identifying the intangibles, allocating their ownership, and the principle that the profit attributable to an intangible follows the functions and value it creates
DEMPE	The five functions — Development, Enhancement, Maintenance, Protection and Exploitation — and the attribution of ownership to the party that performs them, with the contribution and value-creation analysis: 5.7-5.12
Value creation and the residual	Where the intangible creates value beyond the routine contribution of the parties, the residual is allocated to the side that creates and controls it
Highly valuable intangibles	The special attention due to an intangible whose value is a material driver of the group’s profits, where a one-sided benchmark is not reliable and a split of the profit is called for
Cost contribution arrangements	The CSA: the agreement under which group entities contribute to, share the costs of, and receive rights in, an intangible, with the DEMPE allocation applied to each contributor

5.7-5.12 — DEMPE

In paraphrase, the DEMPE provisions attribute ownership and the profit to the party that performs the development, enhancement, maintenance, protection and exploitation of the intangible — and, where those functions are spread across the group, to the party that contracts out, controls and bears the risk of the unperformed functions. Three consequences follow.

• Ownership follows function, not title. The entity that holds the legal title but does not perform (or control) the DEMPE functions is not, on the provisions, the owner for profit-allocation purposes. The entity that performs — or contracts, controls and bears the risk of — the DEMPE functions is.
• The residual goes to the value creator. Where the intangible creates value that the routine contributions of the parties do not explain, the residual is allocated to the side that creates and controls it — the routine vs entrepreneurial line, applied to intangibles.
• The contribution is measured, not asserted. The file must show which party performed which DEMPE function, what it cost, and what value it created — the analysis behind the DEMPE glossary entry and the functional analysis that feeds the tested-party decision in Chapter 2.

Highly valuable intangibles

In paraphrase, the provision requires that where an intangible is a material driver of the group’s profits — a highly valuable intangible, or HTVI — a one-sided method on the routine party is not reliable, and the residual profit is split. This is the provision that justifies a profit split over a one-sided method: the profit split provisions are the mechanism, and the HTVI analysis in this chapter is the trigger.

Cost contribution arrangements

Where the group develops an intangible together, the cost contribution arrangement (CCA) is the contract that fixes the contributors, the cost shares and the rights each receives. The DEMPE allocation applies to each contributor: the profit follows the functions performed and the value created by each side under the arrangement. The cost sharing arrangement guide covers the working definition and the entry/exit mechanics.

What it means in practice

The reader’s map maps Chapter 5 onto Indian law directly:

OECD concept	Indian provision
Intangibles/DEMPE (Ch. 5)	s.92(1) + s.92C(3) considerations; TPO practice

The map also flags the divergence: the OECD’s newer intangibles refinements versus Indian case law that still lags them. In practice the DEMPE analysis is the argument both sides run — the taxpayer to allocate the profit to the value creator, the TPO to test whether the routine side’s contribution is really routine — and the file must carry the function-by-function breakdown either way. The intangibles fact pattern in working detail is covered in the intangibles TP guide.

Where this takes you

• The allocation logic in practice: functional analysis.
• The method this chapter most often points to: profit split method.
• The line between the routine and the value creator: routine vs entrepreneurial.
• The group development contract: cost sharing arrangement.