Meaning
Analytical framework evaluating the development, enhancement, maintenance, protection, and exploitation of intellectual property to determine appropriate profit allocation among group members. This approach moves away from legal ownership as the sole factor for determining who should earn the returns from intangible assets. The dempe intangible valuation focuses on which entities actually perform the vital functions and manage the risks associated with the asset.
If a company in China performs the research and development that enhances a patent held by a parent company, it should receive a share of the profit. This methodology is central to the transfer pricing guidelines of the State Taxation Administration. It ensures that profits follow the people and the activities that create value rather than the legal paperwork.
Function Breakdown
Analysis begins by identifying the specific contributions made by each related party during the lifecycle of the intangible. The dempe intangible valuation requires a detailed audit of which entity funded the research and which team managed the daily development work. Maintenance involves the ongoing efforts to keep the asset relevant, such as software updates or quality control.
Protection refers to the legal and administrative tasks of filing patents and defending them against infringement. Exploitation is the actual use of the intangible in the production of goods or the provision of services. Each of these five categories is weighed to determine its economic importance.
The entity that makes the strategic decisions and bears the financial risk usually commands the largest share of the residual profit.
Economic Ownership
Determination of who truly controls the asset is more important than who holds the title in a registration office. The dempe intangible valuation looks for the mind and management behind the intellectual property. If the legal owner lacks the technical expertise to manage the asset and simply outsources all work to a subsidiary, the owner is entitled only to a limited return.
The subsidiary performing the development and enhancement would then be entitled to the lion share of the income generated by that asset. This concept prevents multinational groups from parking valuable IP in low tax jurisdictions where no actual business activity occurs. Chinese tax officials frequently use this logic to challenge royalty payments made to foreign affiliates.
They demand evidence that the foreign recipient is actively involved in the DEMPE functions.
Reward Allocation
Calculation of the final transfer price depends on the relative value of the functions performed by each party. The dempe intangible valuation often leads to a profit split method where the total income from a product is divided based on contribution. A simple cost plus markup is rarely considered sufficient for entities performing high value enhancement or exploitation tasks.
If a local factory improves a global manufacturing process, that factory must be compensated for the value of that enhancement. Failure to align the profit distribution with the functional profile results in significant tax adjustments. Documentation must show the headcount, qualifications, and specific activities of the employees involved in the process.
This rigorous evidence is necessary to sustain a transfer pricing position during a formal investigation.
