Three Truths (And a Lie) About Transfer Pricing in the Metaverse

Transfer pricing professionals have the pleasure (and the challenge) of specializing in a discipline that is increasingly valuable, though often unfamiliar, even to those who need it the most. At a cocktail party, revealing you are a transfer pricing specialist can be met with the same response reserved for an unusual charcuterie board. Partygoers are generally unfamiliar but maybe a little intrigued, and if you explain the value of the subject matter well enough, they just might give it a bite.

An equally unfamiliar and even more intriguing topic is the metaverse. This portmanteau of meta (from the Greek meaning “beyond” or “outside of”) and universe (that is, existing matter and space considered in time) is part buzzword and part buzzsaw – shifting how we might interact and cutting through our customary paradigms.

It is not simple, but here are three certainties to keep in mind.

First, transfer pricing in the metaverse is not transfer pricing business as usual. Transfer pricing examines controlled transactions between affiliated entities through certain universally accepted characteristics, generally, the functions performed, assets employed, and risks assumed by the various related parties (aka the “FAR” characteristics), to develop economic analyses typically aiming to be consistent with the arm’s length standard. The FAR characteristics of related parties have become increasingly difficult to pinpoint as companies digitize with less and less physical footprint, particularly delineating which parties own and employ which intangible assets.

Enter the metaverse – a place where companies are not digitizing, they are digitally native. A physical footprint is antithetical, and virtual goods and services may not have a clear real-world equivalent. In the metaverse, parties can organize, govern, operate, and even fund themselves without having to rely upon (or theoretically conform to) many of the social constructs binding our universe. Time zones do not exist. Boundaries are only self-imposed. Names and identities (in the given sense) are optional, clever gamer handles and avatars the cloak of anonymity. Can the arm’s length standard still be applied in a place with no physical arms?

Second, the metaverse is still something like a transfer pricing business, as usual. Benjamin Franklin famously quipped, “In this world, nothing can be said to be certain except death and taxes.” In the universe, death is determined when physical existence ceases, as verified by others in the universe. In the metaverse, the construct of singular existence can live forever – passed on through the blockchain and verified instantly in a million iterations. If that is to come of death, what of taxes?

Well, as Franklin posits, taxes are still a near certainty in the metaverse. Parties may operate outside of time zones, physical boundaries, and traditional legal constructs (like names), but they still must be tethered to the universe for sustenance – electronic, nutritional, or otherwise. The governments in our universe will still have an interest in their piece of the pie, despite their challenges on how to actually digest it. While the Founders of metaversal businesses may prefer to keep spinning without being tethered to a real-world location, some tax authority somewhere IRL will try to anchor it.

So third, with all of this, the metaverse offers transfer pricing opportunities. The metaverse goes beyond the universe, offering new opportunities and modes of living. Attempts to apply purely universal transfer pricing approaches to metaversal applications will miss that opportunity. Our approach to FAR analyses and even our approach to the arm’s length standard, should be revisited and redeveloped beyond universal norms. If nothing else, it will make for great cocktail party conversations.

And now, the lie … that businesses established in the metaverse do not need to comply with real-world regulations. Franklin’s missive still holds, and tax authorities will frequently try to anchor a business in the metaverse to its regulations, no matter how tenuous the rode. It’s best for Founders of these businesses to get there first, to at least somewhat control how tight it will be anchored and structured IRL. Like all global companies, a company operating in the Metaverse that takes a proactive approach to telling the story of its business and establishing an appropriate tax and transfer pricing structure will be well positioned in the face of scrutiny.

If you are a party operating in this space, Withum would love to collaborate with you, to help design the most tax-efficient transfer pricing strategy for your unique business.