Transfer Pricing and BEPS
SPEAKER NOTES FROM AISTEMOS ROUNDTABLE ON THE ROAD AHEAD FOR TAXATION AND IP, MODERATED BY NIGEL SWYCHER ON 23 MARCH 2016
Dominic Robertson, Tax Partner, Slaughter and May
Dominic’s four main messages were all centred on the different ways in which governments are trying to address tax base concerns arising from the use of IP:
- The OECD BEPS project has recommended major changes to the way in which transfer pricing rules will treat IP, so that (for those countries adopting the rules) value generated by IP will be attributed to the countries where the people generating and managing the IP are based, not the countries which contractually own (or fund the development of) the IP - the latter would get, at most, a funding return. As Kelvin noted in the meeting, this is a welcome shift towards commercial reality - but, as Paul noted, it can be difficult to identify where IP is “really” generated in a world of complex supply chains.
- The BEPS project has also attacked preferential tax regimes for IP, such as the UK patent box. Again, this focuses on encouraging actual development of IP in a particular territory - so income generated on acquired IP, or IP developed through related party outsourcing, would no longer qualify for preferential rates.
- Domestically, the UK and Australia have sought to increase their powers to tax IP used (but not owned) in their countries, by implementing major extensions of their IP withholding tax rules. That marks a shift away from the trend over the last 25+ years - and is a clear attempt to grab low-taxed IP profits generated by US IT companies in particular.
- Finally, and perhaps surprisingly, there is still a lot of debate amongst tax authorities over exactly what constitutes IP which should generate a taxable return. In some countries, especially in the developing world, a lot of weight is put on “marketing intangibles” such as a company’s “workforce in place” (or even the size of the domestic market); in the UK, we have seen HMRC challenge the notion that a brand is an IP asset - instead, they argue that it is a collection of different legally protected rights, each of which should be valued separately (where the sum of the parts is much less than the value of the collective whole).
Paul Morton, Head of Tax, RELX
- The tax treatment of IP is very important for multinational companies in all industries (not just those thought of as IP-rich). Many industries were represented around the table.
- The digital economy is ubiquitous. The appropriate tax treatment of the digital economy is also critical.
- IP valuation methodologies employed in the tax world have “come of age”. Experts like Kelvin who have always used thoughtful and intelligent methodologies are now more in the mainstream and “rules of thumb” are more historical.
- IP law, and IP tax law need to be properly understood and have also developed a great deal in the last few years.
Kelvin King, Senior Partner, Valuation Consulting
Kelvin spoke from the economic and financial IP valuation expert standpoint of the OECD plans.
Kelvin was happy with the movement away from problematical exemplars of old Transfer Pricing practice, market and comparability, which too often proved inadequate in detailed examination. Basing arm’s length price determination on traditional and well-trodden intangible asset valuation techniques was a better place to be. Responding to Dominic, rarely does one intangible asset drive the OECD outcome of assessing the source and location of value creation.
A brand for example would typically compose of trademark, copyright, design right, perhaps patents in many industries, knowledge, know-how, trade secrets, formula and be significantly impacted by key people from marketing and technology in the value driven outcome. The allocation of risk, functions and assets will never be an algorithm however complex. Profit allocation will remain as far from science as art.
It was no problem to him that various calculations can produce 4 different values: there are minimum values that a licensor would accept on each of the positions of licensor and licensee and then there is the maximum values a licensee would accept from each perspective measuring their view of contribution by value (not cost), legal ownership, management, location of significant people with capability and authority, and the location of risk itself. Then build in the overlap position where a fair negotiation would settle.
It is all about the scheme of global risk within an organisation and where does your bit sit. Kelvin agreed with Paul, global value chains are a complex topic; there are many people involved in producing goods and services, there are echelons, hierarchical structures, market chains and relationships, with weightings of risk (and value) at every stage.
Sometimes the same person does different things and or same things from different digital media and locations. Some businesses are highly integrated and managed in confusing structures. These things need to be peeled away to present, as best able, a comprehensive and simple explanation that tax authorities can find it easier, rather than more difficult to follow through. It serves no one to present huge documents with numerous conclusions as to random outcomes. This only leaves those who are charged with the determination of your negotiations with a suspicion they are being presented with spurious accuracy. Not the way forward for any negotiation, let along a settlement.
There is no question that the issue of legal ownership, and the functions each ownership position performs, identifies that the assets will be a bundle of rights and have various uses and risks that would be considered fairly as arm’s length in different and frequently changing circumstances. It is never a bad thing to regularly impair the view in past appraisals, in the light of a developing internal and external marketplace. The credibility of illustrating contemporaneous reviews is powerful, rather than reacting to questions much later of Authorities and knee jerk responses when memory may be weak. Regulatory filings will be tested severely in 2017 by tax authorities, prepare the groundwork in 2016.
Aistemos’ next Roundtable on the changing roles of IP and IP strategy may be of interest