Intellectual property in the age of BEPS

Transcription

1 Intellectual property in the age of BEPS Tax Executives Institute Michigan Chapter Detroit 28 October 2015

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This presentation is 2015 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 1

3 Your presenters Terry McDowell, Moderator Canada Tax Desk, New York Ernst & Young LLP , Mark Mukhtar International Tax Services, Central Region Ernst & Young LLP , Stephen Slazinski International Tax Services, Detroit Ernst & Young LLP , Erwin Sieders Dutch Tax Desk, Chicago Ernst & Young LLP , Page 2

4 Today s agenda Introduction Intangibles landscape change IP transfers Developments impacting IP structures What can you do now? Page 3

5 Introduction What is intellectual property (IP)? The identity, ownership and valuation of IP for tax purposes is rarely the same as for accounting or legal purposes. Traditional IP Technology (patents, copyrights, know-how, formulas, processes, designs, etc.) Marketing (brands, trademarks, trade names, etc.) Customer-related (contracts, subscriptions, customer lists, etc.) Page 4

6 Introduction New categories of IP User base (and relative stickiness of that base) IP that is integrated with high-value services (Software as a service (SaaS), as an example) Cloud technology infrastructure Digital rights Adaptions of product designs for mobile or other unique channels of distribution Centralized engineering centers Location savings Other types of IP Goodwill Workplace in force Group synergies Networks Page 5

7 The IP life cycle Establishment phase Offshore versus onshore models IP incentives Patent/Innovation box Amortization regimes IP valuation Funding of transfer payments Debt versus equity Circular flow of cash Development phase Loss utilization and exit planning Cost-sharing arrangements and substance Treas. Reg (d) DEMPE functions Impact of Altera case R&D expense funding Intercompany financing and 956 F/X and hedging Commercialization phase Deferral planning Permanent establishment considerations Holding companies and treasury centers Use of branches (check-the-box or actual) Future acquisitions Ongoing transfer pricing Exit strategies Page 6

8 Intangibles landscape change Page 7

9 Offshore IP ownership concept Minimal substance Not taxed Contract/Toll manufacturer Royalty Contract manufacturing services US Parent P owner Principal Limited risk distributor (LRD) Sales/ Distribution agreement Sale Transfer of existing IP License Customer Typical functionality and taxation IP owner Minimal substance High royalty income No taxation Principal No or minimal substance Minimal taxable income (high income, high royalty charge) No or minimal taxation Manufacturer/Distributor High royalty charge to Principal Minimal taxation No substance requirement at level of Principal to benefit from low withholding tax rate under tax treaty Page 8

10 Intangibles landscape change 1980s Owner 1990s Legal owner Economic owner 2014 Legal owner Controller/Functional contributor Investor Developer Developer Developer/Functional contributor Routine developer User User Value contributor Pure user Non-routine (residual claimant) Routine Page 9

11 IP structures in the current environment Onshoring considerations Impact of base erosion and profit shifting (BEPS) action plan Potential in-country pitfalls Location of DEMPE functions Reconciling existing activities with new profits Future ability to obtain rulings Availability of patent or innovation box Sustainability of structures IP committees and branch planning US cost-sharing and Altera Cash management and capital markets considerations Page 10

12 Around the world Intangibles raise complex transfer pricing issues because They account for a high proportion of the value/profits of MNEs in various industries They are hard to price/value a multiperiod perspective is usually necessary and there are rarely reliable comparable Germany 2008 Hypothetical arm s-length test and transfer of functions regulations Australia China India Mexico Mexico Broader powers to recharacterize transactions Audit directive to broadly investigate outbound license and services fees, especially if payment to no/low tax jurisdictions Introduction of safe harbor rules (e.g., minimum expected operating profit margins); application of location savings and location rent Increased transfer pricing audit focus on location savings, local marketing intangibles and IP transactions Tax reform bill with provisions that seek to increase taxable income from contract manufacturing Netherlands Spain Decree with provisions on transfers of IP; valuation of hard-to-value IP and cost-sharing Business restructuring cases. IP and services policies under examination Page 11

13 IP transfers Page 12

14 IP transfers: exit strategies and considerations 367(d) regulations IP partnerships and Notice Page 13

15 367(d) regulations Proposed regulations released 14 September 2015 Effective for transactions occurring on or after this date Major components Eliminate foreign goodwill exception under Reg (d)-1T Generally limit application of the active trade or business exception of 367(a)(3) to certain tangible property and financial assets Generally treat foreign goodwill and going-concern value as an asset subject to 367(a) ineligible for the modified active trade or business exception, but permit US transferor to elect to apply 367(d) instead Regulations under 482 released in conjunction Page 14

16 IP partnerships US CFC FP IP OpCo 1 OpCo 2 royalty (after) Facts US and CFC are related US contributes IP and CFC contributes operating business to FP US and CFC each receive a partnership interest with no special allocation or preferred interest Prior to partnership transaction US earns royalty income from license of IP to CFC Royalty income brings little to no foreign tax credit (FTC) After partnership transaction US owns partnership interest Receives distributive share of partnership income with significant foreign taxes Page 15

17 IP partnerships: Notice Treasury and the IRS announced the intent to issue regulations under 721(c) providing that 721(a) will not apply when a US Transferor contributes 721(c) Property to a 721(c) Partnership, unless the gain deferral method described in the Notice is applied with respect to such 721(c) Property and 482 and 6662 applicable to controlled transactions involving partnerships to ensure the appropriate valuation of such transactions 721(c) Property Built-in gain property, subject to certain exclusions 721(c) Partnership Domestic or Foreign Partnership if : (1) one or more foreign persons related to the US Transferor is a direct or indirect partner in the partnership and (2) the US Transferor and related persons own more than 50% of the interests in partnership capital, profits, deductions or losses Regulations under 721(c) are effective immediately Page 16

18 IP partnerships: Notice Gain deferral method requirements Remedial allocation method Proportionate allocation Reporting requirements Acceleration events Subsequent contributions Page 17

19 Developments impacting IP structures Page 18

20 Developments impacting operating models Intangible property (IP) Action 5 Harmful tax practices Real economic activity versus harmful tax practice Modified nexus approach Deep focus on substance Action 8 Transfer pricing for intangibles DEMPE functions Revised transfer pricing standards for intangibles European Union (EU) state aid Data privacy and protection Page 19

21 Potential BEPS implications Offshore IP ownership Low substance no DEMPE (develop, enhance, maintain, protect and exploit) functions Not taxed Regular tax paid after deduction of expenses, including royalty Contract/Toll manufacturer royalty Contract manufacturing services US Parent P owner Principal Limited risk distributor (LRD) commissionaire Sales/ Distribution agreement sale Cost-sharing agreement/ buy-in of existing IP License Sale Customer BEPS considerations Potential impact of Action item 2 on hybrids Impact of Action item 7 should be reviewed (permanent establishment (PE) scrutiny) Is the royalty structured in an arm s-length manner in view of EU state aid investigations? Action items 8, 9 and 10 DEMPE functions Cost contribution/sharing arrangements and US branch planning Alignment of principal remuneration with its functions and risk profile Consider items to be disclosed under Action item 13 Audit focus from continental EU jurisdictions on distributor/commissionaire returns Future onshoring of IP Page 20

22 DEMPE functions under Actions 8 and 10 Action 8 proposes a taxpayer review of: Performance/control of key functions Provision of assets and funding Bearing and control of risks in the following key areas DevelopEnhanceMaintainProtectExploit Taxpayers are directed to review the allocation of profits, for each DEMPE component, with respect to the level and nature of activity undertaken If the legal owner neither controls nor performs the functions related to the development, enhancement, maintenance, protection or exploitation of the intangible, the legal owner would not be entitled to any ongoing benefit attributable to the outsourced functions. Page 21

23 DEMPE functions under Actions 8 and 10 Action 10 proposes a RACI analysis of responsibilities and decisionmaking to measure relative contributions to value RACI = Responsible, Accountable, Consulted, Informed Identify key value drivers (technology innovation, marketing, customer relationships, content development) Identify processes (functions) in the value chain and identify their relative contribution to the value drivers (engineering, process design, pricing, customer service, advertising, strategic planning, production planning, etc.) Assign RACI responsibility for each process by entity and its contribution to overall value Page 22

24 Responding to BEPS developments Future state global (onshore) structures Shared Services Center Shared services R&D services Contract R&D providers Interest US Parent FinCo Principal Contract manufacturing Contract manufacturers Loan Sales Customer Local distributors Sales/ Distribution rights Organizational structure Existing (non-us) IP transferred to Principal Principal can finance IP acquisition with a mix of debt and equity Tax considerations Amortization of IP based on fair market value at time of transfer Innovation/Patent box regimes plus existing R&D credits or other incentives Exit charges and/or significant change in value can be mitigated (e.g., through price adjustment) Transfer pricing considerations OECD Guidelines, including results of BEPS Action Item 8 Compensation for DEMPE activities outside Principal Local distribution model Page 23

25 What can you do now? Page 24

26 What can you do now? 2015 Understand your operating model IP ownership and rulings concluded Location of people functions Transfer pricing policy Corporate structure and governance Financial statement positions Perform a sustainability check Consider available options and perform analyses Perform a coordinated risk assessment Identify alternatives that you can consider to reduce risks Consider controversy and reputational risks, as well as resource considerations Outline changes, estimated timing and implementation costs Stakeholder engagement Take next steps Develop design and implementation work plans Page 25

27 Questions?

28 Thank you for your participation. Page 27