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Intellectual Property & Tax:
How to maximise the opportunities
18 April 2012
Paul Garland, Michael Cashman & Suzy Schmitz
Taxation impacts on the creation,
commercialisation and ownership of IP
Government schemes to reward innovation and
tax-efficient structures are available
These are relevant when creating, acquiring and
exploiting IP
Today’s session will cover:
1. Taxation in the life-cycle of IP within a
business, from research and development
to disposal
2. Tax issues relating to IP ownership,
including intra-group licences and IP
holding companies
Introduction
1
Taxation is
relevant at
every stage in
the IP life
cycle
Co
nte
nts
Section Page
1 Introduction 2
2 Generating and Acquiring IP 4
3 Commercialising IP 14
4 Group arrangements 22
5 Questions?
2
Generating and acquiring
intellectual property
1 3
Summary of relevant IP rights
Taxation
regimes are
relevant to a
range of
intellectual
property
rights
Patents
Trade Marks
Copyright &
Database Right
Confidential
information and
know how
• protect inventions
• can encompass products and processes
• duration of 20 years from their filing date
Important for: software companies, products
• designate source or origin of goods or services
• registered for 10 years and can be renewed
• can comprise words, logos, slogans, colours
Important for: suppliers of goods/services
• copyright can protect literary works and databases
• Database Right also protects databases
• attach on creation
Important for: information/data companies
• techniques, processes, information, used by a
company, including trade secrets & know how
• protected by common law duty of confidence
Important for: all businesses 4
IP rights are “intangible assets”
Part 8 of the
Corporation
Tax Act 2009
(CTA) is
relevant to IP:
5
Section Key term/Summary of section
712 “Intangible asset”
• has the meaning it has for accounting purposes
• covers intellectual property, including:
– registered and unregistered rights
– similar rights under the law of other countries
– know how and confidential information
713 “Intangible fixed asset”
• defined as “intangible asset acquired or created by the
company for use on a continuing basis in the course of the
company's activities”
• Includes an option or other right to acquire or dispose of an
intangible asset
715 “Goodwill”
• Part 8 CTA applies to goodwill
• Goodwill has the meaning it has for accounting purposes
Company IP
IP acquired
IP produced by/for the company
IP licensed in
Generating and acquiring IP
IP can
accumulate
within a
company in a
variety of
ways
6
A key issue is obtaining a deduction for the costs incurred in
creating IP. Under general principles, a deduction is available for direct
costs incurred in developing IP when the expenditure is recognised as a
deduction in the P&L account. This is generally when the expenditure is
incurred
Enhanced deductions may also be available – see discussion below
Some expenditure will be treated as capital expenditure and written
off over time. For example certain expenditure incurred on the creation
of a website
If IP development is done on an intra-group basis, consider alternative
remuneration structures to minimise up-front tax bills
Cost sharing agreements can be extremely useful in spreading
development costs between group companies and ensuring that the IP is
owned by the correct group company – but any cost sharing arrangement
must be correctly structured to avoid unexpected tax charges
7
General Taxation issues for company-produced IP
When
activities are
carried on
which create
IP a number
of tax issues
should be
considered:
In addition to the general tax rules, many jurisdictions offer incentives
for R&D activities in their jurisdiction
The specific incentives which are available for certain R&D
expenditure can be quite valuable and are likely to be an important
consideration in designing and structuring an IP development
programme – this is especially true where a multi-national group has
a choice of jurisdictions in which to undertake R&D activities
Generally, the incentive is provided in the form of enhanced tax
deductions in relation to specific forms of R&D expenditure
As an added benefit, in some jurisdictions there will be an opportunity
for excess R&D deductions to be “sold back” to the government for a
cash payment – this can be helpful for the cash flow of early stage
companies
8
Tax Incentives for R&D Activities
Incentives
exist to
encourage
companies to
invest in and
undertake
R&D activities
Small and medium sized companies can claim a tax deduction equal to
225% of the expenditure incurred on qualifying R&D activities which benefit
a UK trade
The expenditure can include in-house R&D and also sub-contracted
R&D. In addition, there is no geographical restriction on the expenditure
As an additional benefit, an SME can surrender some or all of the loss
relating to the R&D deduction back to HMRC in exchange for a cash
payment
Cash payment equal to approximately 25% of the R&D expenditure –
therefore the amount of the cash payment is less than the amount of tax that
may be saved if the relief was set against future profits – but the ability to
obtain an improved cash flow position is attractive to early stage companies
Large companies can claim broadly similar relief, with a deduction equal
to 130% of qualifying expenditure – but it cannot surrender a loss for a cash
payment
9
UK Tax Incentives for R&D Activities
The UK has
some
generous tax
reliefs
available for
qualifying
R&D activities
In the recent budget the Chancellor announced the introduction
of an “above the line” R&D tax credit
The new R&D tax credit rate will be a minimum of 9.1% of
expenditure
Loss making companies will be able to claim this as a payable
credit
The main driver behind this new credit is to allow the R&D
credit to be included in the budget calculations to support R&D
investment
10
Proposed New UK Tax Incentives
The recent
UK budget
introduced a
new relief for
R&D
expenditure
The patent box regime will be phased in over a five year period commencing
in 2013. Effectively 60% of the benefit would apply in 2013/14, then 70% in
2014/15 and so on, until 100% is available in 2017/18
Under the patent box regime a 10% rate of corporation tax will apply to net
income arising from patents, and also “embedded income” included in the
price of patented products
The patent box regime applies to companies only
It applies to income from qualifying patents granted by the UK and European
Patent offices, or equivalent offices in the EU
Complicated calculation to determine the amount of “embedded income” that
may benefit
The jury remains undecided on whether the complexity of the regime will induce
non-UK companies engaged in these activities to consider alternative regimes
offered by other jurisdictions
UK Patent Box Rules
11
Another
incentive to
be introduced
are the UK
patent box
rules
The main issue when acquiring IP is to obtain a tax deduction for
the costs of acquisition
If the IP is acquired by way of a licence, a deduction for the royalty
payments will be available when the payments are recognised in
the accounts.
By contrast, if a lump sum payment is made the question is
whether it is a payment to use the IP (and thus effectively a
royalty) or to acquire the IP.
The cost of an outright acquisition of IP will generally be
amortised on the basis used in the accounts.
It is possible to elect for the IP to be written down at a specified
fixed rate. This election would be used where the accounts do not
amortise the IP.
Acquisition of IP - Tax Issues
12
Commercialising IP
2 13
Licensing
- data
- brand
- technology
- technology
Commercialising IP - options
IP can be
exploited in
many
different ways
14
Sale
- patent portfolio
- manufacturing
arm (HDDs)
- brand
Licensing of IP Sale of IP
Commercialising IP – the stakeholders
15
Developing
an IP strategy
involves
various
stakeholders
• Identify the value of the technology
• Make sure the strategy fits the business
• IP is often about peoples’ knowledge
• Protect / enforce the rights
• Tax advice
Legal People
Technical Business
When developing a licensing model, consider:
–payment through a lump sum one-off fee, a fee based on
usage (royalty) or a combination?
–when/how will fees be reassessed/increased?
–should minimum fees be set?
–will sales/exploitation targets apply?
–what happens if the IP is invalidated?
Royalties may differ depending on the IP right involved
Licensing IP – payment
Payment for
the benefit of
a licence can
be structured
in a number
of ways
16
The payment may either be the receipt of royalties or one or more
lump sum payments
Royalty payments and payments with the characteristics of royalties
which are received by companies will be taxed when the payment is
recognised in the P&L
Lump sum payments may be recognised over time
If royalties are paid cross border, withholding tax issues may arise.
Tax treaty relief may be required to minimise double tax
Specific tax incentives, such as the UK patent box regime, may be
available
Exploitation of IP – General Tax Issues
17
IP can be
exploited
either by the
sale of the IP
or by the
grant of a
licence to use
the IP
Licence payments may give rise to VAT consequences:
VAT applies to supplies of services, which includes the grant,
assignment or surrender of any right
The grant of a licence to use IP is therefore a supply for
purposes, and as a consequence VAT is payable on the
royalties
Where the IP is supplied to a business in another EU state, no
VAT is chargeable as the supply is a zero rate export
Similarly, the supply of IP to a non-EU business is also VAT
free, as such a supply is outside the scope of VAT
VAT Issues
18
When IP is no longer recognised in the balance sheet, there will be a
disposal for tax purposes
Credit or debit to be brought into account for tax purposes on that
realisation, calculated by comparing proceeds with costs and
amortisation
Consider any potential tax charges if transferring IP to an IP holding
company
Various reliefs may be available to shelter any credit or debit:
– intra –group transfers can be made on a tax free basis, but beware
of future de-grouping charges if the transferee leaves the group
– roll-over relief if proceeds reinvested
Disposal of IP
19
Tax issues on
the disposal
of IP
A few other issues to consider:
Where transactions are between related parties, transfers will be
treated as occurring at market value
A number of countries (such as Japan, China, USA and UK) are quite
strict on transfer pricing, as they consider substantial tax may be
obtained. The US, for example, got $3.4 billion from GlaxoSmithKline
in respect of marketing intangibles
To avoid transfer pricing adjustments, royalty rates between
connected companies should be on an arms length basis
Important to ensure arrangements are adequately documented
Group R&D facilities should also be provided on an arms length basis
Other Tax Issues
20
Group Arrangements
3 21
Typical scenario of:
Parent company
Multi-jurisdiction operating companies
Multi-jurisdiction services and marketing companies
R&D centres
Outsourced development work
May well be beneficial to set up an IP holding company
Single group company which is the owner of the world-wide IP
of a multi-national group of companies
Costs / benefit analysis required
Intra-group arrangements
22
Group structure
23
IP Holding
Company
Operating
Entities
= IP assignments &
licence fees = IP intra-group licences KEY:
R&D Company Operating
Entities Operating
Entities
Third
party
R&D Co
PARENT COMPANY
Tax savings (more to come on this)
Revenue shifting
Streamlines management and control
Manpower and resource efficiency savings
Maximises value
Flexibility on disposals
IP holding company - benefits
24
In which jurisdiction will the IP be exploited?
What general tax planning opportunities exist to reduce the overall
group tax cost and the compliance costs?
Any potential withholding tax costs must be reduced or eliminated
The company must be structured/operated to be tax resident only in
its jurisdiction of incorporation
The application of potential anti-abuse rules must be considered
The company must have adequate substance and/or an acceptable
assumption of risk to justify the profits it is allocated
Any tax cost arising on the transfer of the IP to the IP holding
company
Tax Issues to consider
25
A number of
tax issues
need to be
considered
when
establishing
an IP holding
company
Additional legal risks/considerations:
What IPR?
Assignability of IPR
Recordal
Licensing IPR
Intra-group licences
Future IPR and R&D
Damages and injunction risk
IP holding company
26
Choice of jurisdiction for IP holding co.
27
Choice of jurisdiction for IP holding co.
28
Country
UK
Specific Tax Regime
Patent Box Regime – 10% rate of tax
Ireland No specific regime but 12.5% corporate tax rate
The Netherlands Patent Box Regime – effective tax rate of 5%
Belgium Patent income deduction of 80% provides an effective
tax rate of 6.8%
Luxembourg 80% exemption for certain income and capital gains
attributed to IP – provides an effective tax rate of 5.72?
Hong Kong No specific regime but 16.5% corporate tax rate
Singapore Various tax incentives available, which may allow a 5%
or 10% rate of tax
Bermuda/Channel
Islands Tax free receipt of income and capital gains
Switzerland No specific regime but possibility of 8.5% rate of tax
Ou
r te
am
Paul Garland
Head of IP/Litigation
ddi 020 7710 1617
Michael Cashman
Tax partner
ddi 020 7710 1619
29
Suzy Schmitz
IP/Litigation Associate
ddi 020 7710 1632
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