Rethinking Value Creation: Intellectual Capital, Local Know-How and Enhancement Functions in Transfer Pricing

Multinational enterprises operate in various countries through limited-risk subsidiaries and capture the residual profit as the intellectual property owner. These subsidiaries generate economic returns and enhance firm value through the intellectual capital (IC) that they possess and the know-how that they develop. At the same time, the IC that they hold and its management give rise to specific risks, which must be assumed and controlled by the subsidiaries. In transfer pricing analyses, it is essential to consider the subsidiaries’ IC, the know-how they create, and the risks they assume when tracing the value chain and identifying the party that bears and controls risk.