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TAX CLINIC

Recovery of overpayment via the
assignee’s tax return
Although recovery of the overpayment
of federal income tax is not possible via
Form 941-X, the employer is not with-
out recourse, as the normal tax equaliza-
tion process requires that the employee
return to the employer a refund of tax
that was paid by the employer on the
employee’s behalf. Because during the
assignment the company is responsible
for the assignee’s actual tax liabilities,
any reduction in tax on the assignee’s
return reduces the assignee’s tax burden
that the company has assumed.
From John T. Seery, J.D., LL.M.,
Washington, D.C.
OECD DEMPE and risk
guidance in the US maintenance, protection, and exploita- such risks must be compensated for
Development, enhancement, main- tion of intangibles. their contributions under the arm’s-
tenance, protection, and exploitation The present discussion explores length principle.
of intangibles (DEMPE) is a concept DEMPE and points out significant dif- The rationale behind DEMPE is
first introduced by the Organisation for ferences between the OECD Guidelines to help both taxpayers and tax authori-
Economic Co-operation and Develop- and the Treasury regulations under Sec. ties achieve an accurate assessment of
ment (OECD) in the 2015 Final Report 482, concerning DEMPE and risk. transactions, identify the entities per-
on Actions 8–10, “Aligning Transfer forming DEMPE functions, and ensure
Pricing Outcomes with Value Creation,” DEMPE and the analysis of risk an arm’s-length return for them. To
part of its base-erosion and profit- As stated by paragraph 6.32 of the this end, paragraph 6.34 of the OECD
shifting initiative. OECD Guidelines, in transfer-pricing Guidelines provides a precise analytical
The Actions 8–10 report provides cases involving intangibles, it is crucial framework for analyzing intangibles in
guidance specifically tailored to de- to determine the entity or entities controlled transactions:
termining arm’s-length conditions for within an MNE group that are ulti- ■ Step 1: Identify the intangibles;
transactions that involve the use or mately entitled to share in the returns ■ Step 2: Identify the full contractual
transfer of intangibles between related derived by the group from exploiting arrangement;
parties under Article 9 of the OECD intangibles. So too is determining ■ Step 3: Identify the parties perform-
Model Tax Convention. This guidance, which entity or entities within the ing functions, using assets, and
which has since been incorporated into MNE group should ultimately bear the managing risks related to intangibles
the OECD Transfer Pricing Guidelines costs, investments, and other burdens in relation to DEMPE;
for Multinational Enterprises and Tax associated with the DEMPE functions. ■ Step 4: Confirm the consistency
Administrations (OECD Guidelines), The OECD Guidelines also recognize between contractual arrangements
addresses the opportunities for base that, while the legal owner of an intan- and conduct of the parties through
erosion and profit shifting resulting gible may receive the proceeds from functional analysis;
from the transfer of intangibles among exploitation of the intangible, other ■ Step 5: Delineate the actual
members of a multinational enterprise members of the legal owner’s MNE controlled transactions related to the
(MNE) group. Under this guidance, group may have performed functions, DEMPE of intangibles; and
members of the MNE group are to used assets, or assumed risks that are ■ Step 6: Determine arm’s-length PHOTO BY VUDHIKUL OCHAROEN/ISTOCK
be compensated based on the value expected to contribute to the value of prices for the delineated transactions.
they create through functions per- the intangible. The members of the Before the DEMPE concept was
formed, assets used, and risks assumed MNE group performing such func- introduced, the legal ownership of in-
in the development, enhancement, tions, using such assets, and assuming tangibles by an associated enterprise was

12 June 2022 The Tax Adviser