Global taxation of intellectual property

New and emerging tax policies create
high-stakes balancing act

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Top of mind

Intellectual property (IP) is a matter of high stakes, going ever higher. In the US alone, IP-intensive industries represent more than a third of gross domestic product (GDP).  And the value of IP continues to grow in the global economy — seemingly overnight. It’s no wonder there is tension in the air.

Multinational companies today can find themselves on a tightrope as they seek to manage their IP cost-effectively in a hypercompetitive global market. And when it comes to the global taxation of income derived from IP, companies are buffeted by tailwinds, crosswinds and headwinds.

Tailwinds: Governments are multilaterally declaring an end to low-tax competition by some countries seeking to attract companies’ IP to their shores, adapting and adopting new OECD guidelines on BEPS for the taxation of patented inventions and copyrighted software in countries around the world.

Crosswinds: On the one hand, some countries are now looking to lure companies with new (or newly BEPS-compliant) IP tax incentives. On the other hand, some countries are looking to publicly challenge and fine companies that they deem to be artificially diverting taxable profits from their shores to take advantage of IP tax incentives abroad. Even more paradoxically, some countries are doing both.

Headwinds: Uncertainty is building a strong headwind, as these new tax policies continue to take shape. Tax uncertainty hinders business and innovation, as the prospect of variable taxes clouds profitability. A new and unpredictable era of global tax transparency is also ahead, with the rollout of a country-by-country (CbC) information-sharing mechanism among the world’s tax authorities — and with spiking media coverage of leaked tax information.

IP tax policy exerts pressure

For companies, IP is the core of continuous innovation, growth and profitability in the global digital economy. Amid changing tax rules, however, some global IP-intensive companies find themselves at a crossroads regarding how they have structured their supply chains and where they locate the IP they exploit commercially in products and services worldwide.

The BEPS Report (Action 5) calls 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 its preferential tax rate. Meanwhile, a growing number of countries are considering or introducing entirely new patent boxes, while other countries have aligned or are aligning existing patent boxes with the OECD’s approach.

But taking advantage of such incentives can be a double-edged sword. Many countries — often some of the same as those with patent boxes — have launched anti-tax avoidance strategies, with a particular focus on digitally advanced, IP-intensive companies.

The business of IP is ever more complex

Whether for companies rethinking, building or expanding value chains, IP taxation may not top the list of criteria for where to locate substantial operations, but it can become a critical competitive differentiator as the choice narrows to the top three candidates for locating the company’s next US$5 billion research facility, to give an example.

For many companies with decentralized business models and global R&D, there will be multiple choices and evaluations, with taxation as only one of those choices..

Key takeaways

Companies must find the right balance on the tightrope between tax opportunity and risk as IP stakes go ever higher and policy winds continue to swirl. Tax executives and their C-level peers need to consider action along the following lines:

  • Closely monitor the global, interacting and kaleidoscopically changing landscapes of technology and taxation for both opportunities and risks.
  • Make sure that the tax function is fully aware of what is going on inside the company, as well, and that tax  executives are included from the start in any discussion regarding business change.
  • Employ a much more active engagement strategy with tax administrators, for appropriate tax outcomes, and with tax policymakers, for rational rules and regulations..

Ask yourself

  • Are you making sure that your company’s profits and profit-making activity align?
    • This is particularly important for reflecting on where key IP value-driving activities are performed.
  • Do you conduct risk and opportunity assessments including possible value chain scenarios and strategies?
    • These should be done periodically as well as episodically amid ongoing and sudden changes in the tax environment.
  • Are you maintaining adequate documentation and analysis?
    • This is your first line of defense as a new era of tax transparency begins.