IP strategist: BEPS initiative has big implications for IP departments
New OECD rules aimed at tightening international tax compliance make questions of IP management and the contribution of intangibles to profit critical pieces of corporate strategy
The Organisation for Economic Cooperation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) initiative has had a direct impact on IP strategy and how IP departments must behave in order to comply. It presents an opportunity to raise the strategic profile of intangibles within organisations, as well as the professionals who manage them.
Back in 2015, the OECD and G20 countries approved a 15-point BEPS initiative to address tax planning practices that exploit loopholes in tax rules which create opportunities for the artificial shifting of profits to low-tax jurisdictions. All countries serving as headquarters to large multinational enterprises have since introduced new reporting obligations compliant with transparency requirements.
What led to BEPS reform
These changes in the international tax system directly affect how intellectual property is viewed and managed. Today, more and more multinational enterprises rely on intangible assets, such as the outputs of innovation and branding, to generate financial returns. The value that intangible assets contribute to profits represents a difficult challenge for tax reporting; for this reason, the OECD has specifically highlighted IP-related reforms. In particular, transfer pricing (ie, transactions that occur between the individual entities of a larger multinational enterprise) can be employed to maximise profits after tax on a huge scale. For example, when Uber formed the business entity Uber International CV in the Netherlands, it shifted ownership of several foreign subsidiaries to Uber International CV, which then agreed to split the profits from Uber’s intellectual property, effectively shielding almost all of its ride-share income outside the United States from US taxes. This strategy is not illegal and similar approaches have been used by Google, Facebook, Starbucks and GE. The OECD estimates that up to $240 billion in potential income tax has not been collected due to these loopholes.
Action 8 – a broader definition of intangible assets
The 15 actions outlined in the BEPS initiative are projected to end the unintended benefits of inconsistent tax legislation. Multinational enterprises must now review the function of their intangible assets (ie, their development, enhancement, maintenance, protection and exploitation functions). This broadens the definition of asset ownership and more accurately guides the calculation of transfer pricing related to intangible assets. If the legal owner does not meaningfully and demonstrably develop, enhance, maintain, protect or exploit the intangible asset, it should not be entitled to any portion of the profits.
However, this in turn creates the need for a broader description and understanding of intangible assets. The OECD defines ‘intangible assets’ as “something which is not a physical or financial asset, capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties”. Intangible assets can include:
- technologies protected with patents, know-how, copyrights or trade secrets;
- marketing assets, including trademarks and brands; and
- other customer-related assets, such as contractual rights or government licenses.
With the OECD’s broader definition of intangibles, IP departments must now implement company-wide processes that ensure the vast majority of valuable intangibles are captured, tracked and appropriately used. This is an opportunity for IP professionals to guide transfer pricing and strategic decisions and to grow their responsibilities and influence.
Action 13 – reporting
Under Action 13, multinational enterprises must be transparent and prepared to fully disclose intangible assets to enable tax authorities to conduct an audit. As such, they should have:
- a complete list of significant value-creation intangibles and all relevant metadata, including ownership and ascribed value;
- a description of the overall strategy and company structure for development, ownership and exploitation of intangibles; and
- a description of the group’s transfer pricing policy.
Therefore, multinational enterprises will need new, tailored workflows and the necessary IT infrastructure to capture intangible assets in an organised format that can be easily distributed to tax authorities. This is another area where IP professionals will have the opportunity to lead and educate business leaders on the functional and economic advantages of intellectual property.
How IP strategists should view BEPS
BEPS creates an opportunity for intellectual property and the management of intangible assets to become a more integral and strategic part of board-level planning, and highlights the commercial and strategic value of intangibles and IP management. Knowledgeable and commercially aware IP professionals will be crucial for business leaders to fully understand the implications and value of a company’s intangibles. As 2020 approaches, it will be critical to foster intra-departmental engagement, education and collaboration between tax and IP advisers.
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