In our previous issue we spoke with you about tax scandals in recent years that had affected a number of very big companies. The imposed penalties have led to tensions between the EU and the countries, in which these companies operate, since the EU compelled Ireland to impose a corresponding fine on Apple, which apart from using tax benefits, creates thousands of jobs for the country…
The topic turned out to be quite relevant, so I suggest we should continue our conversation….
The topic of taxation of intangible assets and its main actors, as well as transnational companies, has received a lot of attention. But we forget that this issue concerns many other companies, mainly, startups and innovative companies that cannot yet boast of high profits.
With violent critique of preferential tax regimes for companies with intangibles, the brightest examples of which are such companies as Facebook, Apple, Starbucks etc, the fact, that such tax regimes extend, first and foremost, to such sources of revenues as patents, is pushed to the background. It takes years of research, hard work, and huge costs to obtain a patent, not only to develop an innovative product or a process, but, mainly, to protect it around the world.
In the wide audiences only a few people would ask a question: what percentage of conducted scientific research and development would lead to the establishing of a patent? In other words, how much of expense remains expense without leading to a patent, hence a source of income…? But when this work is crowned with success, perhaps, 1 attempt out of 100 or even more, and the patent becomes visible, and the income becomes palpable, – for some reason, this natural desire of a company to use a preferential tax regime for such a special income faces a mostly negative reaction.
But there is the other side of the coin? When companies start abusing appropriate benefits and create artificial schemes with no real substance and costs behind them…
That’s absolutely true. It was a lot of abuse of various tax benefits foreseen by the legislation of various countries, as well as rapid development of innovative economy for which there were no proper tax concepts that led to a big loss of revenues in the form of taxes by many countries. These factors have driven the OECD to develop the BEPS (Base Erosion and Profit Shifting) action plan.
What’s the aim of this OECD plan and what is life going to be after the BEPS?
The BEPS plan considers many areas of taxation and includes 15 actions, among which we, selectively, can mention the following:
1. Address the tax challenges of the digital economy.
2. Adjustment of international taxation rules to neutralize the effect (e.g. double non-taxation, double deduction, long-term deferral) of hybrid instruments and entities.
3. Strengthen controlled foreign company rules.
4. Limit base erosion via interest deductions and other financial payments and other actions.
An important place in the list of actions is taken by intangible assets and the issues of transfer pricing. As to intangible assets, the use of tax benefits can only happen in the jurisdiction these assets had been developed and exclusively by the owner of IP that had led the development. Patents and comparable rights fall under the preferential tax regime of income from intangible assets, the so-called IP BOX. Defining other acceptable assets is a prerogative of individual states and can include brands, as well as software and other things. Today the OECD recommends to include only patents and comparable assets, but Italy, one of its member-states, has already introduced the Patent Box regime adopted by the OECD and included both software and brands, which leaves hope for inclusion of these categories of assets by other countries, including Switzerland. As to the novelties of transfer pricing, an adjustment of requirements to the submitted documentation on transfer pricing is recommended in such a way, that all the states, involved in the transaction, could see the whole picture of creating added value and distributing expenses and a tax base. In other words, a number of states have made submission of documentation on transfer pricing mandatory if a company, or rather a group of companies, wishes to obtain a tax ruling.
What would you be your advice to companies in this new context?
All the companies and countries are now in the transition period. States are starting to change their national legislation, introducing new standards and rules, as this is happening in Switzerland. The automatic exchange of information among a number of countries has already started or will soon come into force. It is so important now to work at restructuring and implementing new rules for preparation of documentation (mainly, on transfer pricing), irrespective of the fact how big your company or a group of companies is. It is especially important for companies that possess intangible assets or have developments that might lead to their creation.
So, our company, IP Global Solutions, specializes on assisting exactly such companies…