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Intellectual Property Rights IP Tax Planning
In the Age of Anti-avoidance
Intellectual Property (IP)
Intellectual property (IP) is increasingly the catapult to wealth creation in this age of innovation and globalisation. The World Economic Forum named innovative IP has estimated at least 75 industries are highly dependent on IP creation for further growth.
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.
Base Erosion and Profit Shifting
Pursuant to the BEPS initiative, the OECD has called for ‘new international standards’ for international taxation. Much of its agenda focuses on the international taxation of IP profits. For starters, the BEPS initiative accuses MNCs of causing distortions in the global economy by abusive planning that result in non-taxation of corporate profits, and states that transfer-pricing rules must be improved to combat this, including those related to IP profit shifting.
The initiative specifically advocates additional substance and transparency rules in order to benefit from any preferential regimes (including IP tax regimes) and linking the taxation of IP-related profits to where IP is created.
The BEPS initiative is a manifestation of global discontent and concern among nations that IP profits are not sufficiently taxed – though how a group of 34 nations with competing tax-policy objectives will be able to agree on new international tax standards is far from clear.
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
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.
Uses of an SLP
- A Scottish L.P. is an ideal solution for those who prefer to operate a company incorporated in the EU and to have a totally tax-free facility at the same time.
- Funds structures
- SLPs can be used flexibly in funds structures.
- SLP as main fund vehicle
- The SLP can be a main funds vehicle because:
- It can hold assets in its own name;
- There can be multiple but passive investors (the limited partners);
- Only one person manages the investments and business of the partnership (the general partner);
- Tax transparency means that each partner is taxed on the profits it receives, the amount of which will be determined by the limited partnership agreement.
SLP as a participant
Because it has separate legal personality, the SLP can also be used in funds or other structures which require ‘persons’ to be members. A common example of this is the use of the SLP as a carried interest partner. A ‘carried interest partner’ facilitates the filtering of a percentage of the profits of the main fund to the fund manager. An example of a structure is in this diagram.
The above structure comprises a main funds vehicle which is a limited partnership (and could be a SLP). The SLP is itself made one of the limited partners in the main funds vehicle. This is only possible because the SLP has separate legal personality: limited partnerships registered in other jurisdictions could not fulfil this function. The fund manager is one of the limited partners of the SLP. The profits from the main funds vehicle filter through to the SLP and from there to the fund manager (how and when this happens is determined by the limited partnership agreements). As the SLP is tax transparent, the fund manager is taxed directly on the profits it receives.
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