In view of increased globalization of various\u00a0industries in particular, technology-based industries\u00a0such as electronics, multimedia, software and\u00a0biotechnology, there is a substantial increase in\u00a0international transfer of products, services, and revenues.<\/p>\n
Intellectual Property (IP), in many cases\u00a0it is\u00a0one of the most valuable assets of an organization.\u00a0Choosing the right location for the centralization and management of IP is a very important strategic business decision. The ideal location to establish an IP structure is one that can\u00a0serve the organization\u2019s business strategies\/model, safeguard and protect its IP and contribute to its tax optimization.<\/p>\n
<\/p>\n
One of the critical issues in taxing Intellectual Property (IP) is characterizing the transaction between the IP owner and the\u00a0user. In general, if the IP owner relinquishes legal title and all substantial rights to the IP for a fixed\u00a0payment, tax law characterizes the transaction as a sale of the underlying IP.<\/p>\n
Actually, the tax policy protect\u00a0the position that payments contingent on the transferee\u2019s sales or profits are like royalties, because they are spread out over a period of years and give the transferor an\u00a0continuing interest in the property, and thus should not be given capital gains treatment.<\/p>\n
When a multinational enterprise (MNE) group is\u00a0addressing the development of a new intangible, the\u00a0subject of determining which member of the group\u00a0should be the developer or owner of the property\u00a0often arises. Depending on how the rights and obligations to the parties are structured, the\u00a0arrangement could constitute a legal relationship\u00a0such as:<\/p>\n
\u00a0Cost-sharing arrangement
\u00a0Provision of technical services for a fee
\u00a0License or sale of existing technology
\u00a0Partnership<\/p>\n
A cost-sharing<\/em> arrangement is an agreement\u00a0under which the parties agree to share the costs of\u00a0the development of one or more intangibles in\u00a0proportion to reasonably anticipated benefits from\u00a0their individual exploitation of the interests in the intangibles assigned to them under the arrangement. Under a valid cost-sharing agreement, both a\u00a0domestic parent and its foreign subsidiary (for\u00a0example) will incur R&D expenses and both will\u00a0deduct them to reduce taxable income.<\/p>\n However, if\u00a0the foreign subsidiary is located in one of the tax havens like Bermuda or the Cayman Islands\u00a0where the tax rate is zero, the deduction will not\u00a0arise for the foreign subsidiary.<\/p>\n A cost sharing<\/em> arrangement involves the\u00a0joint development and use of intangible property\u00a0through the agreement by more than one controlled\u00a0or uncontrolled party to share the costs of the project. However, a different case occurs if an\u00a0arrangement specifies that one party will provide\u00a0the research and development (R&D) services for\u00a0another party, and that the second party will be\u00a0responsible for the costs and risks and therefore\u00a0entitled to the project\u2019s benefits. Instead of being a\u00a0cost-sharing arrangement, it would be a services\u00a0arrangement under which one party is a service\u00a0provider and the other is the owner (developer) of the technology.<\/p>\n If the terms of an arrangement are, in effect, that\u00a0one party agrees to be responsible for the costs and\u00a0risks of the project and, at the same time, to get a\u00a0full deduction of incurred R&D expenses of the\u00a0developed product<\/em>, but another party agrees to acquire certain rights in the intangible when the\u00a0development project is complete, the arrangement\u00a0for the development of technology could be an\u00a0advance license or sale.<\/p>\n The other party might also agree to make an\u00a0advance payment to the developer, and payment\u00a0might be viewed as an advance royalty or purchase\u00a0price<\/em>. The form of consideration is non- determinative\u00a0of whether the arrangement is a\u00a0license agreement or not. If a transferee of an\u00a0intangible pays a nominal or no consideration and\u00a0the transferor has retained a substantial interest in\u00a0the property, the arm\u2019s length consideration shall be in the form of a royalty, unless a different form is\u00a0demonstrably more appropriate.<\/p>\n A partnership arrangement<\/em> (also called a joint\u00a0venture arrangement) typically involves a joint\u00a0undertaking to conduct certain joint business\u00a0activities. The terms of the respective rights and\u00a0obligations of the partners, or ventures, are\u00a0established in a detailed partnership agreement. How it works the scheme?<\/p>\n Companies that adopt this strategy typically cut\u00a0their taxes by between 5% and 25%. This effective\u00a0tax-planning strategy has been employed by\u00a0numerous MNE’s.<\/p>\n","protected":false},"excerpt":{"rendered":" In view of increased globalization of various\u00a0industries in particular, technology-based industries\u00a0such as electronics, multimedia, software and\u00a0biotechnology, there is a substantial increase in\u00a0international transfer of products, services, and revenues. Intellectual Property […]<\/p>\n","protected":false},"author":2,"featured_media":6307,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[9756],"tags":[8592,8588,8593,8589,8590,8591],"class_list":["post-7239","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog","tag-intangible","tag-intellectual-property","tag-rd","tag-tax-policy","tag-transferee","tag-transferor"],"featured_image_src":{"landsacpe":["https:\/\/altax.al\/wp-content\/uploads\/2017\/10\/ip.png",400,181,false],"list":["https:\/\/altax.al\/wp-content\/uploads\/2017\/10\/ip.png",400,181,false],"medium":["https:\/\/altax.al\/wp-content\/uploads\/2017\/10\/ip-300x136.png",300,136,true],"full":["https:\/\/altax.al\/wp-content\/uploads\/2017\/10\/ip.png",400,181,false]},"yoast_head":"\n
This is a much less inclusive undertaking than a\u00a0cost-sharing arrangement, in which participants\u00a0typically would come together solely for the\u00a0purpose of jointly developing intangible property, not for jointly exploiting the property once it is\u00a0developed or conducting any actual business\u00a0operations. In this sense, a cost- sharing agreement\u00a0is merely a contract to develop an intangible that\u00a0each participant will have the right to exploit in its
respective business operations. Under a partnership\u00a0or joint venture arrangement, however, a separate\u00a0legal entity is established to conduct the jointly\u00a0owned enterprise.<\/p>\n\n
– The next step is that the MNE\u00a0parent\u00a0company sets up an offshore holding\u00a0company located in a low tax\u00a0jurisdiction.
– Then, an offshore unit buys stake in the\u00a0parent\u2019s existing patent before it starts to\u00a0generate any value. This patent is\u00a0developed jointly by the parent company\u00a0and first\u00a0subsidiary company in the offshore\u00a0places like Cayman, Bermuda, Cyprus etc. under a cost sharing\u00a0arrangement.
– Then, the offshore unit licenses intangibles,\u00a0such as the above-mentioned patent, to\u00a0second\u00a0subsidiary company, typically in a third country\u00a0such as Ireland, Albania, Montenegro etc. which then collects\u00a0royalties from foreign subsidiaries\u00a0that sell the parent company\u2019s products to\u00a0foreign customers.
– Finally, royalties are returned by second\u00a0subsidiary company\u00a0to first subsidiary company, which forwards\u00a0one portion back to the MNE\u00a0parent and\u00a0keeps its own portion offshore, which is not\u00a0subject to MNE’s residence country.
– The benefit of this sort of transaction is the\u00a0deferral of the transfer of income to a time\u00a0that is tax efficient for the MNE.<\/li>\n<\/ul>\n