Can DEMPE Contribution Be Measured With Greater Consistency

Reproduced with permission. Published 9.8.26

Can DEMPE Contributions Be Measured With Greater Consistency?

Author Bios:

Ami Goldenstein is a Transfer Pricing and International Tax professional with over 25 years of experience, dedicated to optimizing global transfer pricing and tax strategies that drive efficiency, compliance, and risk mitigation. With deep expertise in operational transfer pricing, audits and controversy, intercompany financial transactions, valuations and IC contracts, leverage data-driven insights to develop innovative solutions that support multinationals.

Frank Wang is a Transfer Pricing professional with 15 years of experience across both consulting and in-house leadership roles, advising multinational companies on global transfer pricing strategy, controversy and dispute resolution, operational transfer pricing, business restructurings, and intangible property planning and valuation, with significant experience working with executive leadership, legal counsel, and tax authorities on complex cross-border transfer pricing matters.

Summary: A practical, step-by-step framework helps multinationals consistently measure and document entity-level DEMPE contributions where the OECD Guidelines do not prescribe a standardized quantitative approach. Written by TP Right’s Ami Goldenstein and Frank Wang.

1. 
   

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “OECD Transfer Pricing Guidelines”) have elevated the importance of development, enhancement, maintenance, protection, and exploitation, or DEMPE, placing them at the center of how multinational enterprises and tax authorities assess the allocation of profits from intangible property, or IP. As both taxpayers and tax authorities increasingly rely on DEMPE analyses to evaluate or determine arm’s-length outcomes, the quality and consistency of the underlying functional analysis have never been more consequential. Yet despite the heightened scrutiny, the OECD Transfer Pricing Guidelines do not prescribe a quantitative methodology for measuring DEMPE contributions — leaving practitioners to navigate an inherently subjective process without a standardized road map.

Functional interviews remain a cornerstone of transfer pricing analyses, especially for those involving IP. Because they are inherently qualitative and may be documented differently depending on the interviewer, the taxpayer, or the adviser performing the analysis, translating interview findings into a consistent legal entity-level DEMPE profile can be subjective, particularly where multiple individuals across several legal entities or jurisdictions perform DEMPE functions and activities contributing to the same intangible.

This article proposes a practical, step-by-step framework intended to improve consistency, transparency, and documentation of that process by introducing a structured methodology for measuring and converting individual functional interview results into legal entity-level DEMPE contributions. The framework is offered as a thought-provoking analytical tool rather than definitive guidance, and taxpayers and advisers are encouraged to adapt it in a manner consistent with their specific facts and circumstances.

1. Methodology for Evaluating DEMPE

Functional analyses evaluate the performance of DEMPE activities during the period under examination. They are meant to identify who performs development, enhancement, maintenance, protection, and exploitation functions and provide evidence regarding operational control, decision-making authority, and resource deployment. These observations can be translated into quantitative contribution measures. The methodology presented here focuses on measuring current DEMPE contributions and does not attempt to estimate the continuing economic effect of historical contributions.

The methodology outlined below follows a four-step approach in measuring DEMPE contributions by legal entities of the multinational group.

Step 1: Identifying the individuals contributing to DEMPE for functional interviews

Taxpayers should work with their transfer pricing advisers to identify a list of individuals who might be making non-routine contributions to the intangible property under analysis from a DEMPE perspective for functional interviews. To gather relevant and consistent information for those interviews, practitioners can evaluate each interviewed individual's DEMPE contributions using two common metrics: decision-making authority and time allocation.

Decision-making authority.

This metric evaluates the relative decision-making authority of the personnel and serves as a practical proxy for identifying the personnel who exercise control over the economically significant functions and risks associated with the DEMPE functions, consistent with Chapter VI of the OECD Transfer Pricing Guidelines. Under this metric, each individual interviewed is assigned a score of one through five for each DEMPE function based on the following criteria:

• Score of 5 — Final decision maker: Has ultimate approval authority, can authorize or reject the activity without further approval, and is accountable for the outcome.

• Score of 4 — Primary decision maker: Makes recommendations to the final decision maker or has authority over significant aspects of the decision but requires final executive approval.

• Score of 3 — Shared decision maker: Participates jointly in decision-making with peers or committees, and has meaningful influence but not unilateral authority.

• Score of 2 — Technical adviser: Provides technical expertise, analysis, or recommendations but does not approve or direct the activity.

• Score of 1— Execution only: Performs or oversees execution of work according to established policies or instructions, and has no meaningful authority over strategic decisions.

Time allocation.

This metric estimates how the interviewee spends working time over a typical time frame, product, project, etc., ranging from 0% (not involved at all) to 100% (involved full-time). In other words, the time spent by a particular individual will be allocated among the DEMPE functions they are involved in.

Step 2: Calculating individual DEMPE contributions

For an individual, once the decision-making authority and time allocation metrics are determined for each DEMPE function based on their functional interview, a “DEMPE contribution” will be calculated as the product of the decision-making authority score and the percentage of time spent for each DEMPE function. The multiplication of decision-making authority and time allocation is intended as a simplifying assumption for purposes of creating a consistent analytical framework. The resulting scores should be interpreted as relative indicators rather than precise measures of economic value. For each individual, this calculation will be performed for each DEMPE function as follows:

• Individual DEMPE contribution = Decision-making authority score × Time allocation percentage, where:

• Decision-making authority score = 1, 2, 3, 4, or 5 based on the individual’s decision-making authority for each DEMPE function

• Time allocation percentage = 0 to 100% based on the individual’s time spent on each DEMPE function

Step 3: Converting DEMPE contributions from individuals to legal entities

The OECD's DEMPE analysis is ultimately performed at the legal entity level, not the individual level. Individuals are interviewed because they provide evidence of which legal entity actually performs and controls the DEMPE functions in relation to the intangible assets. Because not every employee contributes equally to the DEMPE of the legal entity that employs them, a weighting factor should also be considered when converting individual DEMPE contributions to legal entity DEMPE contributions. Such weighting factors can include (but are not limited to) the following:

• Compensation

• Executive grade/seniority

• Position level

Using compensation (which often approximates organizational responsibilities) as an example, the DEMPE contributions of a particular individual employed by a particular legal entity will be multiplied by their compensation as a percentage of the total compensation of all the individuals covered by the interviews for that legal entity. The weighted individual DEMPE contributions will then be aggregated at the legal entity level by DEMPE function to establish the legal entity DEMPE contributions.

• Weighted individual DEMPE contribution = Individual DEMPE contribution × Weighting factor, where:

• Individual DEMPE contribution has been calculated in the previous step

• Weighting factor = Compensation of an individual / ∑ (Compensation of all individuals employed by the legal entity covered in the interviews)

• Legal entity DEMPE contribution = ∑ (Weighted individual DEMPE contributions by all individuals employed by the legal entity covered in the interviews)

Because compensation is only used as a weighting factor for individuals within a specific legal entity (rather than across legal entities), this approach ensures that interview coverage influences the weighting of individuals for that particular legal entity but does not, by itself, inflate/deflate that legal entity's relative DEMPE contribution compared with other legal entities.

Step 4: Calculating relative DEMPE contributions by legal entity

In the last step, for each DEMPE function, the DEMPE contribution of a particular legal entity to that function can be expressed as a percentage, with the contributions made by all the legal entities to that DEMPE function adding up to 100%. For each DEMPE function, this relative DEMPE contribution allows one to assess DEMPE contributions by legal entity more intuitively and can be calculated as follows:

2. Relative legal entity DEMPE contribution = Weighted legal entity DEMPE contribution / ∑ (Weighted legal entity DEMPE contributions of all entities covered by the DEMPE analysis)

Once performed on a per-legal-entity/per-function basis, this calculation produces an entity-level DEMPE matrix intended to be consistent with the OECD's recommended function-by-function analysis, as shown in an example below. The methodology intentionally preserves separate measurements for each DEMPE function because different legal entities may control different economically significant aspects of the same intangible.

2. Illustrative Example

Step 1: Identifying the individuals contributing to DEMPE for functional interviews

Assume that the multinational group identifies the following individuals as relevant to the control and performance of its technology-related DEMPE functions. Functional interviews have been conducted with these individuals to understand their specific functions and activities, their decision-making authority, and how their time is spent during a typical year.

• Global head of R&D (US): Exercises final authority over the group's technology strategy, research portfolio, major innovation initiatives, and allocation of global R&D resources.

• IP counsel (US): Leads the legal strategy for the group's intellectual property portfolio, including patent, trademark, trade secret, and IP enforcement matters, while providing legal support to research and commercial teams.

• VP engineering (Switzerland): Oversees global engineering execution, directs major technical initiatives, and manages the design and implementation of new technologies within the strategic framework established by executive leadership.

• VP product (Singapore): Leads product strategy and commercialization, determining how new technologies are incorporated into products and brought to market to maximize business value.

• Engineering director (India): Manages day-to-day engineering operations, oversees technical execution and system reliability, and ensures the effective delivery and ongoing performance of engineering projects.

Step 2: Calculating individual DEMPE contributions

The DEMPE contributions will be calculated for each individual/function, based on the decision-making authority score (1 through 5) multiplied by the time allocation percentage (0% to 100%) that was based on information obtained through functional interviews and subsequent information gathering.

Global head of R&D (US)

• Development: 5 x 35% = 1.75

• Enhancement: 5 x 30% = 1.50

• Maintenance: 2 x 15% = 0.30

• Protection: 4 x 8% = 0.32

• Exploitation: 3 x 12% = 0.36

IP counsel (US)

• Development: 2 x 20% = 0.40

• Enhancement: 2 x 15% = 0.30

• Maintenance: 3 x 25% = 0.75

• Protection: 4 x 30% = 1.20

• Exploitation: 2 x 10% = 0.20

VP engineering (Switzerland)

• Development: 4 x 40% = 1.60

• Enhancement: 4 x 35% = 1.40

• Maintenance: 3 x 15% = 0.45

• Protection: 2 x 5% = 0.10

• Exploitation: 2 x 5% = 0.10

VP product (Singapore)

• Development: 2 x 15% = 0.30

• Enhancement: 3 x 30% = 0.90

• Maintenance: 2 x 10% = 0.20

• Protection: 2 x 5% = 0.10

• Exploitation: 4 x 40% = 1.60

Engineering director (India)

• Development: 3 x 25% = 0.75

• Enhancement: 3 x 25% = 0.75

• Maintenance: 2 x 40% = 0.80

• Protection: 1 x 5% = 0.05

• Exploitation: 1 x 5% = 0.05

Step 3: Converting DEMPE contributions from individuals to legal entities

Assume the following hypothetical compensation by individual. Compensation weighting is applied after the functional interview rather than before, so that organizational seniority does not influence the assessment of an individual's actual DEMPE activities.

• Global head of R&D (US): USD $900,000

• IP counsel (United States): USD $450,000

• VP engineering (Switzerland): USD $600,000

• VP product (Singapore): $450,000

• Engineering director (India): USD 250,000

For each individual and each DEMPE function, the individual DEMPE contributions calculated in the previous step will be multiplied by that individual’s compensation as a percentage of the total compensation of all individuals employed by the same legal entity who are covered by the functional interviews. The resulting weighted contributions are then aggregated at the legal entity level to produce each entity’s overall DEMPE contribution profile.

For the US entity, the individual DEMPE contributions of the global head of R&D and IP counsel, both of whom are employed by the US entity, will be weighted based on their respective shares (which is, 66.7% for the global head of R&D, 33.3% for the IP counsel) of their combined compensation. These weighted contributions are then aggregated to calculate the legal entity DEMPE contributions of the US entity.

US

• Development: 1.75 x 66.7% + 0.40 x 33.3% = 1.30

• Enhancement: 1.50 x 66.7% + 0.30 x 33.3% = 1.10

• Maintenance: 0.30 x 66.7% + 0.75 x 33.3% = 0.45

• Protection: 0.32 x 66.7% + 1.20 x 33.3% = 0.61

• Exploitation: 0.36 x 66.7% + 0.20 x 33.3% = 0.31

For the other entities that only have one employee, that employee’s DEMPE contributions are equivalent to the DEMPE contributions of the legal entity that employs them, as the weighting factors are 100%.

Switzerland

• Development: 1.60 x 100.0% = 1.60

• Enhancement: 1.40 x 100.0% = 1.40

• Maintenance: 0.45 x 100.0% = = 0.45

• Protection: 0.10 x 100.0% = = 0.10

• Exploitation: 0.10 x 100.0% = = 0.10

Singapore

• Development: 0.30 x 100.0% = 0.30

• Enhancement: 0.90 x 100.0% = = 0.90

• Maintenance: 0.20 x 100.0% = = 0.20

• Protection: 0.10 x 100.0% = = 0.10

• Exploitation: 1.60 x 100.0% = = 1.60

India

• Development: 0.75 x 100.0% = = 0.75

• Enhancement: 0.75 x 100.0% = = 0.75

• Maintenance: 0.80 x 100.0% = = 0.80

• Protection: 0.05 x 100.0% = = 0.05

• Exploitation: 0.05 x 100.0% = = 0.05

Step 4: Calculating relative DEMPE contributions by legal entity

The final step involves converting the weighted DEMPE contributions by legal entity into percentages to illustrate each legal entity's relative contribution to each DEMPE function. The following table shows the weighted DEMPE contributions of the legal entities by DEMPE function as calculated in the previous step.

Legal Entity	Development	Enhancement	Maintenance	Protection	Exploitation
	a	b	c	d	e
US	1.30	1.10	0.45	0.61	0.31
Switzerland	1.60	1.40	0.45	0.10	0.10
Singapore	0.30	0.90	0.20	0.10	1.60
India	0.75	0.75	0.80	0.05	0.05
Group Total	3.95	4.15	1.90	0.86	2.06

Each entity's weighted DEMPE contribution for each function is then divided by the group's total weighted DEMPE contribution for that function to calculate a percentage. Maintaining separate percentages for development, enhancement, maintenance, protection, and exploitation per legal entity — rather than having one individual score for each entity — avoids masking the fact that different legal entities may control different economically significant functions relating to the same intangible.

Legal Entity	Development	Enhancement	Maintenance	Protection	Exploitation
	a / ∑ (a)	b / ∑ (b)	c / ∑ (c)	d / ∑ (d)	e / ∑ (e)
US	32.9%	26.5%	23.7%	71.0%	14.9%
Switzerland	40.5%	33.7%	23.7%	11.6%	4.9%
Singapore	7.6%	21.7%	10.5%	11.6%	77.8%
India	19.0%	18.1%	42.1%	5.8%	2.4%
Group Total	100.0%	100.0%	100.0%	100.0%	100.0%

*Note: Calculations in the table above are performed using unrounded amounts. Figures presented in the tables may not sum or recalculate precisely due to rounding.

The illustrative example shows that different entities may contribute disproportionately to different DEMPE functions — for example, one entity may dominate development while another primarily contributes to protection or exploitation. This illustrates why a function-by-function analysis is more informative than a single composite score.

The relative DEMPE contribution percentages presented in the final table are intended solely as an illustrative indication of the relative DEMPE contributions made by each legal entity and therefore should not be interpreted as definitive measures for allocating intangible-related profits. A proper profit split analysis would still require a comprehensive economic analysis, including relevant financial information (for example, P&L statements, benchmarking analyses), comparability considerations, and the specific facts and circumstances of the case. Accordingly, while the percentages generated by this framework may serve as one analytical input to a transfer pricing analysis, they should not be relied upon as the sole basis for determining profit allocations.

3. Key Takeaways

The methodology described in this article provides a structured framework for documenting DEMPE functional interviews and translating individual interview results into legal entity-level functional profiles. While the OECD Transfer Pricing Guidelines require a qualitative analysis of functions, assets, risks, and control, they do not prescribe a standardized quantitative approach. The proposed methodology is intended to supplement that qualitative analysis by improving consistency, transparency, and documentation of the functional interview process. The resulting entity-level DEMPE matrix should therefore be viewed as an analytical tool to assist taxpayers and transfer pricing practitioners in supporting the transfer pricing policy rather than as a mechanical formula for allocating intangible-related profits.

In practice, this methodology may be used in a variety of ways. For example, it may

• Serve as one analytical input to a more detailed profit split analysis

• Provide a reasonableness check on the functions, assets, risks, and DEMPE profiles documented in existing transfer pricing reports

• Support the allocation of headquarters or shared service costs relating to DEMPE activities

• Assist taxpayers in identifying the legal entities that warrant further functional or economic analysis

Regardless of the specific application, the methodology is intended to complement, rather than replace, the broader transfer pricing analysis required under the OECD guidelines.

This methodology is designed to quantify contemporaneous DEMPE contributions based on functional evidence. It should not be interpreted as a complete model for allocating all intangible profits where economically significant historical DEMPE activities continue to influence value. In such cases, additional valuation analyses may be required to distinguish between profits attributable to current functions and those attributable to legacy investments in intangible development.