News that the US Internal Revenue Service is chasing Microsoft for $28.9 billion in back-taxes—plus penalties and interest—relating to a dispute over inter-company transfer pricing between 2004 and 2013, is a stark reminder to companies to bone up on recent tax changes affecting their intellectual property (IP) assets. Microsoft says it will contest the matter through the IRS’s administrative channels and will go to court if necessary.
The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) was established between 2014 and 2018 to combat tax avoidance by multinational enterprises in the digital era. BEPS was responding in part to a surge in transfer pricing among large technology and pharmaceutical companies that sought to exploit a weakness around the tax of intangible assets. Although not unlawful, the practice of shifting profits from intangibles, such as IP, to a preferred lower tax jurisdiction, such as Puerto Rico, Ireland, or Singapore in Microsoft’s case, is considered ethically dubious.
Since BEPS, many countries have begun to amend their IP regimes to counter this imbalance. The UK updated a couple of reporting requirements in April; Germany and Italy have also made changes. While the pace of adoption varies from country to country, all are heading in the same direction.
At company level however, Donal O’Connell, the founder of Chawton Innovation Services, an IP education, training, consultancy, and solutions firm, says conversations between IP managers and finance teams are still not happening, despite the fact that they were supposed to be ongoing since 2014.
“On IP training courses I run, 99.9% of attendees still have no idea of the IP implications of BEPS,” Says O’Connell. “The OECD definition of IP is very broad. It’s not just patents and trademarks—it includes such intangible assets as trade secrets—so companies who don’t keep good records of unregistered assets will face a number of challenges.” When it comes to complex tax group structures and intergroup licenses, O’Connell advises companies to make sure any such agreements match reality. Having heard rumors that UK tax inspectors are attending IP training, he expects IP to become an area tax inspectors in many other jurisdictions will scrutinize closely as well. That being the case, cooperation between IP and finance departments and transparent IP data will be crucial to avoiding fines.