IP Tax Planning in the age of anti-avoidance

Intellectual Property (IP)

At the same time, global business models entice multinational corporations (MNCs) to strategically place their profitable IP rights in low-tax locations as a means to reduce overall tax rates.

However, since the 2008 financial crisis, cash-hungry nations have been hunting for additional revenue and a principal target has been so called ‘corporate tax avoidance’ on the part of MNCs that do not pay their ‘fair share’.

Taxation of these IP rights is increasingly a target of tax authorities, by means of audits, transfer-pricing challenges, and a push to fundamentally reform how IP profits are taxed in the global economy. The OECD’s Base Erosion and Profit Shifting (BEPS) initiative is the tip of this spear.

Regardless of the BEPS initiative’s outcome, IP tax planning continues to receive an unprecedented amount of attention. Notable examples include the public hearings of several prominent high-tech companies in regards to their tax planning, such as Apple before the US Congress or Starbucks and Google before the UK Parliament.

Further, many countries are already ramping up the rules for IP taxation rights, with an increased focus on economic substance. This approach generally requires that economics or business must be the principal motivators – not just the tax benefits – for any changes in IP location.

Examples include the recent codification of the economic substance doctrine under US tax law, with one senator specifically mentioning a ‘gimmick’ of shifting IP rights to a shell company without personnel or operations.

The EU is also pushing for codification and standardisation of the General Anti-Abuse Rule so it can be applied on a more consistent and broader basis to ‘aggressive’ tax schemes lacking business or economic motivations.

Sustainable IP Tax Planning and the impact of new rules

Staying competitive

Incorporating beneficial foreign intangible property structures into Tax Planning

To stay competitive, many multinational companies are looking at restructuring as a means of lowering taxes paid on income derived from intangible property (IP).

Sustainable IP tax planning will need to be able to withstand the impact of these new rules. In practical terms, this means IP tax planning should be increasingly aligned with management and economic activities – particularly as it relates to the IP profits.

This dovetails nicely with most national economic policies. Even if mere rhetoric, almost all countries at least acknowledge that attracting innovation, as well as related IP rights, talent and investment, to their jurisdiction is key to future growth. Many countries offer various tax incentives in the hopes of attracting IP and the associated profits, jobs and capital. The EU’s Lisbon Strategy for a knowledge-based economy has been the fundamental policy driver for the current batch of EU IP boxes.

National Economic Policies

In future, there appears to be potential alignment whereby low-taxed IP and related activities can harmoniously coincide in the same country. This implies IP tax planning needs to be linked to other factors building a business case for moving IP to a specific country.

Factors that will be increasingly relevant include a stable and flexible legal framework and the ability to attract key talent, such as executives, engineers and developers, through incentives such as the personal tax rate, availability of schools and quality of life. Additionally, a country’s infrastructure and the cost of running technical facilities and operations may need to be considered. In the case of R&D activities, the question is whether the country already has a critical mass of brainpower and talent or at least the legal flexibility to quickly migrate them.