BEPS and IP – it’s all about substance

November 17, 2015


Intellectual property (IP) is a classic example of a highly mobile asset, and so it’s no surprise that it’s come under the microscope during the OECD’s BEPS project. While there’s not one BEPS action that deals with IP in the round, most of the BEPS announcements made so far affect IP in one way or another.

A consistent theme running through the BEPS project is the alignment of profit and operational substance. A key principle that can be drawn from the BEPS project is that a business can choose where to create and own IP, as long as it genuinely does manage the development, maintenance, enhancement and protection of the IP in that location.

One issue that can be seen in practice is that for some multinational is that, quite often, IP is currently owned through a company that is both low tax and low substance.

This arrangement is under pressure from the BEPS project, and some jurisdictions have already taken steps in anticipation. For example, the UK has introduced diverted profits tax, Australia is following suit with similar and Germany has already introduced anti conduit rules. We expect other countries to follow these early movers as they try to tax low substance IP owners, where the IP is ultimately used in their territory. This may create risks of double taxation as different territories may seek to tax the same profits.

As a result, many groups are reviewing their IP ownership model, and are looking for locations that combine tax efficiency with natural ‘substance’. In other words, they will look for the tax jurisdiction where they already have substantial IP related business, which has a reasonably low effective tax rate. The UK corporate tax rate is expected to drop to 18% from 2020. Two weeks ago, Angela explained how patent box can reduce the effective tax rate further for a company carrying out qualifying R&D in the UK. Whilst this is very competitive, the UK’s has an additional advantage in that it is a natural hub location for many multinational businesses.


Adrian Gregory

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