Intangible Assets, Tax, Base Erosion and Profit Shifting

The global tax policy landscape is changing dramatically, and the emphasis on intangible assets will shift the scope of service provided by IP professionals. The new international tax rules are closely watched by the tax professionals but the IP community has yet to really recognise the challenges and opportunities it offers to them.

The Organization for Economic Co-Operation and Development (OECD) is at the forefront of efforts to improve international tax co-operation between governments to counter international tax avoidance and evasion. “Base erosion and profit shifting (BEPS)”  refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. Under the inclusive framework, over 100 countries and jurisdictions are collaborating to implement the BEPS measures and tackle BEPS.

The OECD/ G20 BEPS package of measures has been agreed upon and over 100 countries and jurisdictions are collaborating and have confirmed their commitment to the consistent implementation of this comprehensive package. The package provides fifteen actions that range from new minimum standards to revision of existing standards, common approaches which will facilitate the convergence of national practices and guidance drawing on best practices.

Described by the OECD as “the most significant re-write of international tax rules in a century,” the BEPS package provides countries with the powerful tools to standardize compliance requirements and force firms to be transparent about where they generate income.

Essential new feature of the Transfer Pricing regulations is an emphasis on intangible assets. The importance of intangibles for businesses has a dramatic increase in the recent years. It is now recognized that intangible assets account for an increasing part of the business value. However, until now there is no single definition of Intangible Assets in use by the OECD or tax authorities or proper guidance on how such assets should be reported.

The accurate and complete taxation and valuation of intellectual property and other intangible assets is now recognized as one of the most important areas of transfer pricing.

OECD BEPS guidelines from an IP management perspective

In the OECD guidelines, it defines intangible assets as including the following categories

  • Patents
  • Know-how and trade secrets
  • Trademarks, trade names and brands
  • Rights under contracts and government licenses
  • Licenses
  • Goodwill

As a result of these OECD guidelines, multi-national enterprises (MNEs) will now or in in the near future need to be able to recognize the value of intangible assets for their businesses and be ready to identify intangibles and their place in the value chain. Businesses should consider reviewing their value chains to ensure that intangible assets have been correctly identified, including existing contracts and arrangements for the development, enhancement, maintenance, protection and exploitation of intangibles in light of the proposed guidance. These functional and economic analyses will require a depth of knowledge of definitional aspects of intangibles, ownership issues, identification and characterization of transactions involving intangibles and valuation that identifies arm’s length prices for transactions involving intangibles.

MNEs will need to conduct an exercise rather sooner than later to determine if they are OECD BEPS compliant or not, and if not, to then take the necessary actions to ensure compliance. This part of the conformity assessment checks if the MNE has the skills and competencies, knowledge and experience, process and systems in place to enable the MNE to complete these IP data management related tasks, and if not, what actions need to be taken to remedy the situation.

Challenge and opportunity

This provides a unique opportunity for IP professionals to extend their service offering and aggressively occupy this no man’s land – the area of Intangible Assets and OECD BEPS compliance.

The market research shows that until recently Transfer Pricing and Intangibles have been mostly in focus of the Big Four accounting firms and Transfer Pricing professionals. However, there are examples of some Intellectual Property Firms turning their interests towards the new area.

OECD BEPS Compliance offers a great opportunity to IP professionals, but to win it requires a cross discipline team with knowledge and understanding of the different forms of intangible assets, with experience of the different IP activities as listed by the OECD, with insights into how MNE organize and operate their IP activities, and with an appreciation of the goals and objectives of the OECD BEPS guidelines.

This is the first blog in a series, exploring OECD BEPS guidelines from an IP perspective. The next blog will explore these guidelines in more detail.

Donal O’Connell, IPEG consultant, managing director Chawton Innovation Services Limited

A special thanks to Alla Sakharova for her contribution to this blog.

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