Global tax revolution will put corporate IP strategies under far greater scrutiny

Intellectual property and other intangible assets are going to be getting much more attention from tax authorities over the coming years.

Many multinationals have long used transfer pricing – the practice of distinct legal entities within a business charging each other for the use of goods, services and IP they hold – to reduce their exposure to tax. That has seen the emergence of some highly aggressive strategies, such as the fabled Double Irish with a Dutch Sandwich, which have already come under close regulatory scrutiny.  

Now, though, a more concerted and much broader approach from tax authorities to treating such arrangements is emerging.

This is thanks to the OECD/G20 Base Erosion and Profit Shifting (BEPS) package, a series of measures that more than 100 countries and jurisdictions have confirmed a commitment to implementing on a consistent basis.

Fundamental IP management impact

Donal O’Connell, the founder and managing director of UK-based Chawton Innovation Services, has spent a great deal of time going through BEPS and argues, powerfully, that because it creates far more detailed reporting requirements for IP and other intangibles it will also have a fundamental impact on the way in which they are managed in multinational enterprises (MNEs).   

Described by the OECD as “the most significant re-write of international tax rules in a century”, the BEPS package provides tools that will enable the standardisation of compliance requirements and compel businesses to be transparent about where they generate income.

“Simply put,” says O’Connell, who was previously a VP of R&D and a director of IP at Nokia, “more and more tax authorities now view OECD BEPS as their 'bible' when it comes to intergroup licences and transfer pricing of intangibles between group members.”

While it has long been understood that intangible assets can often create a substantial part of a business’s value, O’Connell explains, up to now there has not been a single definition of them used by tax authorities or the OECD. Furthermore, there has been no proper guidance on how these assets should be reported.

As a result of BEPS, however, all that could be about to change. The accurate and complete identification, valuation and taxation of IP and other intangible assets has now formally been recognised as a key area in international tax reform and transfer pricing legislation.

O’Connell sees six issues from an IP perspective in the new BEPS regime:

• Tax authorities are now much more interested in corporate intangible assets and how these are being managed.
• Their definition of intangible assets is very broad and goes beyond registered IP. It includes: patents; know-how and trade secrets; trademarks, trade names and brands; rights under contracts and government licences; licences; and goodwill.
• Tax authorities are going to be less interested in the legal ownership of intangibles and much more focused on economic ownership - the so called DEMPE (development, enhancement, maintenance, protection and exploitation) concept.
• Tax authorities are going to be demanding that companies provide information about their activities when it comes to intangible assets and will have specific reports that they expect to receive. These include: an annual high-level overview of global business operations and transfer pricing policies; detailed transactional transfer pricing documentation on a country-by-country basis; and annual reports for each tax jurisdiction, detailing the amount of revenue, profit before income tax, income tax paid and accrued, and other indicators of economic activities.
• Tax authorities will not only be interested in the value of the intangibles they wish to see recorded, but also about the risks associated with them.
• Tax authorities may also seek to understand how a company’s IP activities are financed.

Change already happening

Importantly, this is not just theoretical. Various tax authorities have been publishing planned rule changes in line with BEPS since 2019. Some are now implementing these. Chawton Innovation Services has logged cases of companies being audited against BEPS in several countries, including Switzerland, Israel and China.

Furthermore, tax authorities in countries such as Germany and Italy have begun to align their rules with the BEPS package, while in the UK a new BEPS-influenced transfer pricing regime is due to come into force at the start of the next tax year in April. O’Connell also argues that the EU's Anti-Tax Avoidance Directive is essentially the EU's interpretation of BEPS.

All this places a very strong emphasis on MNEs – defined as entities that own or control the production of goods or services in one or more countries other than their home one - deploying a sophisticated and highly-organised approach to the management of their IP. This will include being absolutely clear on what is held and where it is held, all internal and external relationships pertaining to the IP (licences etc), valuations, risks related to the IP and so on.

Onus on IP managers

In other words, the BEPS package places a strong emphasis on senior corporate IP executives having robust, transparent portfolio management processes and systems in place, and working very closely with the finance function to ensure that everything is compliant for reporting purposes and ready for inspection should an audit be ordered.

Put another way, this is an opportunity to turn finance directors into very close allies. After all, those cuts that they might instinctively call for when times are tough are going to have to be given very careful thought before implementation to see whether they might have a detrimental impact on reporting obligations; while additional investments may help to create systems that make everything that much easier to locate, value and record.

Of course, it will also mean having to be prepared for many more tough questions and greater regular oversight from the finance team, so putting a premium on IP managers being entirely on top of their briefs all the time. Whether that is an up or a downside I will leave to you to decide!

O’Connell stresses that he is an IP strategist, not a tax expert, but this is something he has been looking at closely for nearly a decade now. If BEPS turns out to be as significant as he believes it could be, now might be the time for you to start familiarising yourself with it and making plans accordingly.

Joff Wild is the creator of IAM and its former editor-in-chief. He now writes a weekly column for the platform and offers advisory/consultancy services, with a focus on IP policy, strategy, communications, marketing and business development