More companies than ever before are restructuring their intellectual property (IP) assets to meet substance demands since the BEPS measures were finalised and US tax reform was enacted.
The tax directors of 64 multinational companies (MNEs) anonymously surveyed about effective IP management told International Tax Reviewand TP Week about how they are evolving.
The majority of respondents (90%) said BEPS Actions 8-10 have affected their operations, while other developments barely came close. The EU’s Anti-Tax Avoidance Directive (ATAD) only affected 24% of companies, whereas US tax reform had an influence on less than 14%.
Despite the number of companies impacted, one international tax director at a European e-commerce company said it was “simple” to meet the anti-BEPS requirements.
“We analysed where we had people based, where we had key functions and then we concentrated on these aspects,” the tax director told TP Week.
A little more than 61% of companies changed their approach to IP assets after the OECD BEPS Action Plan was finalised, though, with many choosing to use a different methodology for pricing intangibles. The majority of companies favoured the comparable uncontrolled price (CUP) method and the transactional net margin method (TNMM).
However, the third most common method was the profit split. This is despite the problems associated with it, not least the administrative burden of value chain analysis. This could take a series of interviews with key players in the value chain to provide an accurate picture.
“We finalised projections for pricing one of our tech companies and we’re doing profit splits now,” the e-commerce company’s tax director explained. “If it wasn’t for the BEPS project, we wouldn’t have gone with the profit split method.”
The BEPS project has had a fundamental impact on how some companies approach transfer pricing IP assets, but this does not mean the commercial strategy has changed. If anything, companies are bringing tax and commercial considerations closer together as a result.
“How the business operates has largely stayed the same,” one TP manager at a retail platform said. “When the business asks us what makes sense and what we would recommend, we go by the changes in international tax law.”
“You have to take into account whether you have enough man-power where you operate and what kind of profit you can expect,” the manager added.
There are also regional and national differences on methodology. The German tax authorities are much more aggressive on the profit split in audits than tax administrations in other countries, but any discrepancy across a group would be enough to catch their eye.
Bringing the IP home
The rise of substance requirements as a result of BEPS has forced some companies to reconsider their IP structures and, in particular, where to locate intangibles. Naturally, the structures vary hugely depending on the business model, but the survey found clear signs of a trend.
Seventy-five percent of companies claimed to have moved their IP assets onshore in the past five years.
Almost 70% of MNEs confirmed they hold their IP assets in the same jurisdiction as their company headquarters. This is standard practice in some countries, but elsewhere it’s a new phenomenon. For example, in the US, businesses have traditionally worried about locating their intangibles onshore.
One in-house tax consultant at a US biotech company described US tax reform as a “warning” to aggressive taxpayers to correct IP structures before it is too late. There is too much room for error when there is a chasm between commercial and tax.
“The commercial strategy has to come first,” the tax consultant said. “Tax guys have to have a seat at the table with commercial, so they can see where the business is going but it’s not going to be driven by tax strategy.”
“The world has changed. If you look at the profit and loss statement of any major public company today, the business may well be running at a tax loss,” they stressed.
Some US companies have decided to move their IP back to the country because the rewards outweigh the costs. But this is still easier said than done. It takes time to restructure and often it means moving people.
“Moving the IP back to the US is not for everyone, but for some companies it makes perfect sense,” the consultant said. “It’s an opportunity to really align the commercial reality with the tax structure.”
Linda Pfatteicher, managing partner at Squire Patton Boggs in San Francisco, was doubtful that onshoring will become the norm in the US. But she could see why some companies might choose to do so.
“If the company is generating losses overall, then having the IP in one location could provide a benefit and minimise the complexities of the structure,” she explained.
“The biotech and tech industries have had and still have the ability to establish profit shifting structures with more ease than manufacturing companies, for example, just because of their method of operations,” she added.
One company in the same sector decided to unwind its IP structures in the Netherlands and bring its assets back to the US. The company had an aggressive tax structure running through the Netherlands with very little economic substance. This kind of arrangement was normal in the past, but times have changed.
In this case, the commercial team did not want to route its operations through the Dutch structure any longer. Instead, the team decided to restructure and focus its presence through the US, UK and Singapore.
Even after the BEPS project, there is still enough room for global tax planning when it comes to intangibles. What holds back the pace of change is the uncertainty about the direction of future international tax standards.
The full results of the effective IP management survey are available here.