Ownership of intangible assets includes:
legal ownership; and
economic ownership.
The legal ownership of intangible assets refers to the owner of the intangible assets identified through legal registration, contractual agreements, etc.
The economic ownership of an intangible asset is the participant in the economic activity who makes a substantial contribution to the value of the intangible asset, i.e. the organisation or individual who actually performs the function, invests resources and bears the risk in the Development, Enhancement, Maintenance, Protection and Exploitation ('DEMPE Functions') of the intangible asset.
Analysis from a transfer pricing perspective should consider not only the legal ownership relationship of the intangible asset but also the extent of the contribution made in the activities of Development, Enhancement, Maintenance, Protection and Exploitation of the intangible asset.
Under the general principle that profits should be taxed where economic activity takes place and where the value is created, legal ownership does not necessarily result in an economic benefit.
If in the creation and use of an intangible asset, the legal owner only provides funds and does not actually perform the relevant functions, such as Development, Enhancement, Maintenance, Protection and Exploitation, and bears the corresponding risks, then only a reasonable return on the cost of funds should be obtained.
Therefore, it is important to understand the contribution of the local enterprise in the Development, Enhancement, Maintenance, Protection and Exploitation of the intangible asset, especially if the local enterprise is not the legal owner of the intangible asset and the offshore legal owner of the intangible asset has not contributed to the value of the intangible asset, and should not participate in the distribution of the proceeds of the intangible asset.
Reasonable transfer pricing methods must be used to ensure that these contributions by the business operating in Malaysia are reasonably compensated.
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