Our world today is one that has embraced intellectual property (IP) as a strategic asset which can help companies gain sustainable competitive advantage. Many countries understand this, and recognize that the creation and management of IP can help to foster economic growth and create high value added job opportunities. They have accordingly introduced policies and measures which create a conducive fiscal environment, the objective being to attract and anchor innovation and IP management activities in their respective jurisdictions.
Against this backdrop, companies must carefully consider how to restructure their IP holdings and leverage on opportunities to achieve better overall tax efficiency.
Operational Restructuring Provides an Opportunity for Tax Efficient IP Structuring
With increased globalisation, companies enjoy reduced production and delivery costs – this theoretically should lead to increased profits and margins. Balanced against this however, is an increase in global competition and the escalating cost of research and development (R&D), which typically put downward pressure on margins and reduce profitability. To remain competitive, companies therefore need to focus on increasing margins through innovation, improved quality, operational efficiency, effective risk management, etc.
In response to these factors, companies have actively streamlined and re-aligned their operational structures and business models, by managing central functions and risks on a regional or global basis and revising their geographic footprints. When a company expands its business presence beyond its home territory, this presents a strategic opportunity to own its IP rights in a more tax efficient location.
IP Management in the Current Fiscal Environment
Tax planning related to IP is often favoured because of the portable nature of IP and the value that can be attributed to it. Effective tax planning for IP can therefore help to substantially reduce a company’s effective tax rate and significantly enhance shareholders’ value. This may, for example, involve shifting the ownership of IP rights to a more favourable tax jurisdiction.
Such decisions and actions need to be driven by commercial considerations and backed by adequate substance. As such, it has become crucial for businesses to pay greater attention to their IP management activities across the various stages of the IP life cycle, starting from creation to protection and exploitation of IP rights.
The OECD recently undertook the Base Erosion and Profit Shifting (BEPS) Project, the objective of which is to counter, amongst other things, all cross border IP tax planning that lacks substance and results in non-taxation of corporate profits and distortions in the global economy. The initiative specifically pushes for additional substance and transparency rules to be imposed on companies benefiting from any preferential regimes (including IP tax regimes); it also seeks to link the taxation of IP profits to the country where the IP is created.
Despite these initiatives, businesses can – and should – legitimately optimise their IP tax planning as they grow beyond the borders of their home country. However, the IP holding location (and where IP profits are booked) must be aligned with management and economic activities.
Planning for Operational and Tax Efficiency
A piece of IP often starts its life in the parent company’s jurisdiction. Unfortunately, this may be a high-tax jurisdiction. In some instances, IP ownership may also be dispersed across different jurisdictions, depending on acquisition and development patterns. To further complicate matters, under the law, legal ownership (i.e. holding title to that IP) may not coincide with beneficial ownership (i.e. the right to enjoy the benefits from owning that IP), and inter-company transfer pricing policies may not properly reflect and reward the true beneficial owner of key IP rights.
In such cases, operational synergies can be achieved by centralising ownership and management of IP in a single tax efficient location. This can be accomplished through transfer of IP ownership, cost-sharing of IP development costs, licensing arrangements (i.e. licensing of IP among affiliated companies), or by revising transaction flows to coincide with the beneficial ownership of IP. This may involve relocation of people, plant and equipment, or realignment of IP ownership and business risks.
Various commercial factors should also be considered when selecting an IP holding location. Typically, a good IP holding location must have a robust legal framework, available pool of qualified human capital, good standard of living and well established infrastructure to support effective IP management. Another consideration would be the cost of doing business, including taxation.
Even in the current fiscal environment, many countries are keen to attract IP holding companies with substantive business operations. They do so by offering tax incentives which reduce the applicable corporate tax rate or by allowing super tax deductions in respect of R&D costs (i.e. IP development costs). Such countries should also offer access to a good tax treaty network, which will help to reduce withholding tax costs and prevent double taxation.
As with any cross-border restructuring, careful consideration should be given to ascertaining and documenting the arm’s length transfer price of the resulting related party transactions – substantiating the value of the IP in the case of a sale, the basis of royalty charges in the case of a licence arrangement, etc.
It is crucial for companies to consider the following additional issues carefully as they embark on building a robust IP tax strategy throughout the IP life cycle:
- Tax planning for IP rights is most effective when addressed early on in the IP life cycle; the value of IP rights can increase rapidly, making it more difficult to migrate them at a later stage in a tax efficient manner.
- When a mature and valuable IP is transferred, the higher exit taxes involved could be a hurdle for IP migration. There could also be commercial considerations for such migration. For example, migrating the IP rights of a high-profile brand and company may draw negative publicity and attention from non-government organisations, media, public, and various authorities.
- This cannot be a one-off exercise. IP rights are volatile by nature and their value needs to be monitored throughout their life cycle as this will influence the effectiveness of tax planning; in this respect, evolvement from one kind of protection to another over time should therefore be taken into account.
- For example, when a product’s patent expires and the product becomes generic, the product’s brand could become more valuable than the initial patent. The focus of the company may then shift to advertising and promoting the brand and less on R&D. Correspondingly, the emphasis of its IP tax strategy would be more on maximising tax benefits for advertising and promotion activities.
Companies are actively reviewing their operational structures and business models in response to an ever evolving and challenging business environment. Operational restructuring, in particular, presents a unique opportunity for companies to implement IP management structures and to introduce efficient tax strategies. However, in today’s regulatory environment, one needs to ensure that all tax strategies are sustainable and based on commercial considerations; otherwise, it will be difficult to withstand international tax scrutiny.
Tel: +65 6236 3888
Abhijit is an International Tax Partner and leads the Pharmaceutical & Healthcare practice of PwC Singapore.
Abhijit has more than 25 years of experience in advising MNCs on cross-border complex IP and business structures. He specialises in international tax planning, R&D and IP management, incentive negotiation, M&A, post deal integration strategies, and resolving tax disputes. He advises on various facets of IP lifecycle covering creation, acquisition and exploitation of IP rights across different geographies.
Currently, he is involved in assisting various MNCs as they expand their operations using Singapore as a hub. He maintains working relationships with government agencies and is involved in lobbying and advising/sharing views on fiscal policies. He regularly speaks on business and tax issues at media and public forum, contributes articles for various publications and conducts workshops for IP Academy/NUS.
Abhijit is a certified Chartered Accountant and an Accredited Tax Advisor (Income Tax) of SIATP. Currently, he serves as a Board member of IPOS.
Tel: +65 6236 7342
Gina is a 3rd year Manager in PwC Singapore. She has about 7 years of experience in providing corporate tax advisory services.
She has managed complex tax advisory projects involving cross-border issues, including global restructuring exercises for large multinationals moving operations and assets to Singapore and out of Singapore, IP structuring, and tax incentive negotiations with the EDB. These projects involved analysing complex issues relating to legal entity structures, business structures, cross-border transactions, withholding taxes, exit taxes, permanent establishment risk, etc. She also has experience in obtaining advance rulings from the IRAS and stamp duty remission from the MOF.
She was previously in PwC’s R&D Tax Specialist Team: advising clients on the form of entity for R&D centres, identifying potential R&D activities and related expenses eligible for tax concessions, reviewing documentation to strengthen and defend the basis of R&D claims.
She is a member of ISCA and has a Bachelor of Accountancy degree from SMU.