When Paul Simon sang the hit "Slip Slidin’ Away," he had in mind a girl named Delores. When the OECD recently published a report on intangible assets sliding away, they had in mind dollars and euros (Guidance for Tax Administrations of the Approach to Hard-to-Value Intangibles, June 2018).The report clarifies certain controversial aspects of the OECD’s Action 8 dealing with transfer pricing between related parties as part of the OECD BEPS initiative of 2015. BEPS is short for base erosion and profit shifting. Israel joined the OECD in 2010 and has begun adopting the BEPS recommendations.The report says that tax administrations may sometimes be justified in using hindsight to increase a tax assessment if intangible assets (intellectual property) are shifted offshore. What’s the issue?Suppose an onshore company, Eureka Ltd, discovers a way of making a perpetual-motion machine. Eureka Ltd straight away sells the idea to a related offshore company, Kayman Ltd, for NIS 100. In the next two years Kayman Ltd pays Eureka Ltd NIS 10 per year (cost plus 10%), total NIS 20, to develop the idea into a working device than can be produced and sold. Kayman Ltd then goes on to generate a billion shekels of sales of this device, resulting in profits of NIS 900 million in the next five years. After that the device is obsolete.The onshore tax administration finds this a bit fishy and assesses in year eight capital gains tax and royalty taxes on the entire NIS 900 million. Can it do so?What the OECD report saysThe OECD says that hindsight taxation based on “ex post” evidence is appropriate in cases of hard-to-value intangibles (HTVI). The usual suspects are hi-tech companies.What are HTVI?The term HTVI covers intangibles or rights in intangibles for which, at the time of their transfer between associated enterprises, (i) no reliable comparable transactions exist, and (ii) at the time the transactions was entered into, the projections of future cash flows or income expected to be derived from the transferred intangible, or the assumptions used in valuing the intangible are highly uncertain.Typically, the intangible is only partially developed and or novel at the time of the transfer.What is the issue?In such cases, the OECD thinks the taxpayer may know more than it lets on to the onshore tax authority especially in hi-tech cases. This is referred to as “information symmetry.”What the OECD recommendsThe OECD focuses on actual income or cash flow outcomes after the original HTVI transfer.Tax administrations can consider ex post outcomes as presumptive evidence about the reasonableness of the assumptions of the ex-ante (foresight not hindsight) pricing arrangements.Taking into account whether the associated enterprises could or should reasonably have known and considered the probability of achieving such income or cash flows.Where a revised hindsight valuation shows that the intangible was transferred at an undervalue or overvalue compared to the arm’s-length price, a revised price of the transferred intangible may be assessed.The revised price may include, for example, milestone payments, running royalties with or without adjustable elements, price adjustment clauses, or a combination of these.But if the company predicts its cash flow or income to within 20% of the actual outcome (80% accuracy), no revised assessment is needed.What should a company do?A company should consider whether it’s worth transferring undeveloped intangibles offshore. Israel offers lower tax rates for preferred tech enterprises that retain their intangibles in Israel. Other countries offer similar tax breaks through “patent box” tax regimes, e.g. the UK, Cyprus. The US has also adopted similar tax breaks through its foreign derived intangible income (FDII) measure, and a converse measure that penalizes non-US “global intangible low tax income” (GILTI). But the OECD indicates that if a company does transfer intangibles abroad, it should prepare cash flow or income projections at the time with very detailed assumptions, including probability estimates.As always, consult experienced tax advisers in each country at an early stage in specific cases.The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd. email@example.com.