I understand this cookie notice
Marks Paneth uses cookies to provide a customized experience to our website visitors, including identifying interests, remembering preferences and providing security. Marks Paneth also uses third-party services to track usage and create website statistics. By continuing to browse this site, you consent to the use of cookies. However, you may change your browser's cookie settings at any time.
I understand this cookie notice

Intellectual Property and Transfer Pricing Implications of Changing Global Taxation Policies

By Angela Sadang  |  October 9, 2017

The OECD (Organization for Economic Cooperation and Development) – is an inter-governmental economic organization comprised of 35 member countries that was founded in 1960 to stimulate economic progress and world trade.

In October 2015, the OECD issued a report on its G-20 BEPS Project (Base Erosion and Profit Shifting) – which focused on providing governments with solutions for closing the gaps in existing international tax and transfer pricing rules that allow corporate profits to “disappear”, or be artificially shifted to low/no tax environments where little or no economic activity takes place. Much of BEPS centers on intellectual property (IP)-intensive industries.

According to the OECD, tax revenue losses from BEPS are conservatively estimated at $140-240 billion – or anywhere from 4-10% of total global corporate income tax (CIT) revenues.

Because of this massive tax revenue loss exposure – the international tax system, which encompasses transfer pricing, is rapidly changing. These changes are being manifested in coordinated actions by governments, and measures being undertaken by individual countries, to combat profit shifting and international tax avoidance by multinational companies (MNCs).

The OECD has produced a video, which illustrates how the whole BEPS scenario can unfold and spark the need to improve corporate transparency:

Challenges of Managing IP Tax Liabilities

MNCs are facing more challenges than ever managing their IP cost structures, including tax liabilities. There are multiple factors impacting the global taxation of IP generated income and consequently, the transfer pricing of IP.

The new tax and transfer pricing guidelines, reflected in the OECD BEPS Report, attempt to more closely align IP taxation with the venue of economic activity and value creation. These new rules will likely work to combat what have been deemed harmful, low-tax policies enacted by some countries are attempting to attract corporate IP activities – including revenue recognition/taxation on patented inventions and copyrighted software.

Some countries are using new BEPS-compliant IP tax incentives to attract new multinational R&D business activity. These schemes are known as patent boxes, innovation boxes and knowledge development boxes. These are different names for special tax regimes for intellectual property revenues. They typically have a lower tax rate on “qualified profits” derived from products that use IP patents, saving several percentage points off higher corporate tax rates. These schemes are often combined with R&D tax credits.

In the face of these IP related incentives, some countries are looking to publicly challenge and fine MNCs that they think are artificially diverting taxable profits from higher tax jurisdictions to countries offering IP-focused tax saving incentives. Ironically, some countries are doing both.

Uncertainty May Prevail

As these new tax policies take shape, an air of uncertainty is building. Tax uncertainty can hinder business innovation and the ability of IP to help drive corporate growth. The prospect of unpredictable tax liabilities is enough to give any CFO or other C-Suite Executives plenty reason to worry.

For example, the BEPS Report (Action 5) called for a “nexus” approach to qualifying for any IP incentives such as patent boxes, which would require a company to locate its R&D and associated jobs in the country offering the preferred tax rate. The report cites 16 countries and provinces whose tax codes did not align with this approach.

The situation may be further complicated by the rising tide of global tax transparency and new information sharing mechanisms among the world’s tax authorities.

These changes should cause savvy CFOs of MNCs to find the right balance between tax liability management and the risks of being non-compliant when it comes to aligning where IP value is created and where profits are reported. This may require risk/opportunity assessments and value-chain scenario planning which are key to establishing a transfer pricing structure.

For more information on our Intellectual Property Transfer Pricing planning capabilities, please contact:

Angela Sadang – Director, Advisory Services Group| Marks Paneth
212.201.3012 | asadang@markspaneth.com
This material has been prepared for general informational and educational purposes only and is not intended, and should not be relied upon, as accounting, tax or other professional advice.
Please refer to your advisors for specific advice.

Find Out More About How We Can Help You

About Angela Sadang

Angela Sadang, MBA, CFA, ASA, is a Principal in the Advisory Services group at Marks Paneth LLP. Ms. Sadang specializes in business valuations and the valuation of intangible assets and has over 20 years' experience providing corporate financial consulting services and performing valuations. She serves both publicly traded and closely held companies in a wide range of industries that also involves various asset classes. Her valuation experience includes business enterprise and intangible asset valuation for financial and tax... READ MORE +


Upcoming Events

AREAA East Meets West, Real Estate Connect

September 26, 2018
AREAA East Meets West, Real Estate Connect

Join Joanne Chiu, Director of Business Development - China Desk at Marks Paneth, as she moderates the breakout session Residential - Foreign Lending (New Policies and Programs) at the 2018 East Meets West, Real Estate Connect conference presented by the Asian Real Estate Association of America.

Huappage Industrial Association of Long Island Joint Comittee Meeting

September 26, 2018

Annual Nonprofit Industry Update Seminar

October 4, 2018

1031 Exchanges: Understanding the Opportunities and Risks

October 17, 2018

D.C. Finance Real Estate Family Office Meeting

October 23, 2018

Girl Scouts Women of Distinction Awards

October 23, 2018

Long Island Chapter IMA Breakfast Seminar

October 23, 2018

Restaurant Finance and Development Conference

Nov 12-14, 2018
View All Events