Intangible-Related Profit Allocation within MNEs Based on Key DEMPE Functions : Selected Issues and Interaction with Pillar One and Pillar Two of the Digital Debate

The main objective of this contribution is to provide the authors' perspective on selected issues vis-à-vis the DEMPE approach. After an introduction to the DEMPE concept, the contribution analyses a scope-related question, that is, whether article 9 permits or restricts DEMPE-related structural adjustments on the basis of either actual conduct or the commercially irrational exception. To a certain extent, the application of these matters vis-à-vis profit allocation for intangible-related transactions under article 7 is also analysed. Thereafter, it analyses a conceptual issue pertaining to the role of the funder. In particular, it analyses whether the residual profits derived from intangible exploitation should be allocated only to the entity that performs key DEMPE functions, or whether part of such a residual should be allocated to the funder of the intangible, in the event that the latter is an entity different from the entity performing the DEMPE activities. On the practical side, the article initially discusses the challenges that arise for both taxpayers and tax administrations in implementing the DEMPE approach and thereafter proposes certain ways to mitigate those challenges. Finally, the article discusses the role of the DEMPE concept in the ongoing debate on the digitalization of the economy. In particular, it discusses the role of the DEMPE concept in a profit shifting, tax competition and Pillar Two context. Moreover, it examines the role of the DEMPE concept in determining the paying entity/surrender jurisdiction in the Pillar One discussion vis-à-vis Amount A. The article concludes with some key suggestions for taxpayers and policy makers. The contribution is based on recent case law from across the globe, the latest guidance issued by tax administrations and policymakers, the OECD blueprints for Pillar One and Pillar Two and the scholarly literature.Full-text Paper