Thursday, 18 February 2016

When no opportunity for misunderstanding is missed: the case of IP taxation

Does the world of finance know
more about gravitational waves
than it does about IP?
Why is there so much attention on the taxation of intangibles?  Here are a few of the most likely explanations, explains Aistemos CEO Nigel Swycher:
First, since 70% of the enterprise value of major corporations is captured within this asset class, money issues always gravitate to the action. Secondly, as an asset class, intellectual property rights have not been well understood by the world of finance. This is not helped by the fact that the majority of these assets do not appear on the balance sheet, or at least not with valuations that have any close accord with commercial reality. 
Combining the first reason (high value) with the second reason (poor understanding) is pure dynamite to the world of finance, which seldom misses an opportunity to arbitrage such positions. Thirdly, intangibility has been misconstrued to mean invisibility, or at the very least elasticity. This has led to the creation of a whole range of internal corporate structures driven purely by the desire to achieve a particular fiscal result -- often with no regard whatsoever to the torture inflicted on a particular intellectual property right.

The combined effect of all of the above is that IP rights are now centre stage in national and international reforms of the taxation system. There is only one point on which everyone agrees: companies should pay their fair share of tax. So when you read in the Sunday papers that Google, Shell, BAT, Lloyds and AstraZeneca pay virtually no tax in the UK, this is news that offends everyone. But this is a myopic and emotional response.

All multinationals have, by definition, business in many jurisdictions, and all of these countries want a share of the action. This so-called tax-tourism is a two-way street. It is not the fault of the taxpayer that businesses are drawn towards the low tax jurisdictions. Countries actively promote these benefits to attract the multinational “customer”. Viewed through this lens, it is not unreasonable to judge the critical reactions to the UK Patent Box as hypocrisy. Why is a reduced corporation tax, if profits relate to patented inventions, any better or worse than the incentives offered by Ireland, Luxembourg or Bermuda for that matter?

So the implementation of the new base erosion and profit-shifting (BEPS) regime should be greeted sympathetically. Its heart is in the right place -- there should be no artificial structures to syphon profit to low tax jurisdictions. At the same time, understanding what makes up the value of an intellectual property right is hard. Where is a brand created? Does it reside with the legal owner of the registered right or in the place where the marketing takes place? Where is the heart of innovation? With the company that funds the R&D and applies for a patent, or at the physical location of the scientists?
These questions will be explored by an expert panel of Paul Morton (head of Tax, RELX), Kelvin King (Valuation Consulting) and Dominic Robertson (Slaughter and May) on 23 March. 

Click here for further details or to register for the event.

Also on this subject: "The road ahead for Taxation on IP", here.

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