Tax office targets multinationals over IP rights transfers

The Australian Taxation Office (ATO) is considering new rules for brand names, trademarks, copyright and licences to deter multinational companies from transferring billions of dollars in IP rights overseas. The ATO has prepared a confidential discussion paper that outlines a law to tighten the rules relating to transfer pricing.

The ATO has identified IP rights as a topical issue, especially as royalties for international related-party dealings are on the rise. It is therefore reviewing the royalties paid and received by top-listed companies, as well as examining external databases that register the transfer of IP rights offshore.

Analysis by The Australian Financial Review (January 21 2008) has shown that major companies including Cadbury Schweppes, Foster’s Group and Shell Australia have recently transferred hundreds of millions of dollars in IP rights overseas.

Experts said that top-listed companies were taking advantage of countries with more favourable jurisdictions for IP rights, such as Ireland, Singapore, Hong Kong and Switzerland. When ownership rights are transferred overseas, royalties are paid to the overseas parent company, lowering the Australian companies’ annual tax bills.

The content of the confidential paper is expected to be finalised early in 2009. Tax experts consulting on the paper have said the proposed new guidelines mean that multinational companies will need to prove that an IP rights transfer was a bona fide commercial transaction to the satisfaction of the ATO.

According to the ATO, the purpose of transfer pricing rules:

“is to counter the underpayment of Australian tax by requiring businesses to price related-party international dealings according to what truly independent parties acting independently would reasonably be expected to have done in the same situation. Pricing that is not in accordance with Australia’s transfer pricing rules is often referred to as international profit shifting."

The ATO has adopted the so-called ‘arm’s-length principle’. On the subject of transfer pricing and marketing intangibles, the ATO considers a range of factors, including the level of investment in developing the brand or trademark in Australia and the duration of the agreement between the trade name owner and local marketer (or corporate subsidiary).

The government’s response will also be shaped by the release of a draft paper from the Organisation for Economic Cooperation and Development examining the issue later this year.