How will US Tax Reform impact the IP model of your operations? Now is the time to review your IP strategy and perform a full value chain analysis.
The most in-depth changes to US tax regulation in 30 years touch all multinationals that have a footprint in the US.
Tax reform was specifically designed to make the US a more attractive place in which to invest and to base commercial activity. Indeed, from a pure corporate tax rate perspective, some of the big winners are companies that already hold intellectual property (IP) in the US.
Some may be tempted to use Tax reform as a lens through which to take a fresh look at their company IP model and make radical changes. But any decisions on restructuring IP holdings need to be made in a broader context that goes beyond the new US tax landscape. Ultimately, much like BEPS, the US question cannot be answered in isolation.
What US Tax Reform certainly does offer is a compelling argument for businesses to take a closer look at their IP and its position in the value chain.
The first question to resolve is whether a company should repatriate IP held outside of the US. You may not be surprised to learn that single question breaks down into many smaller ones.
For instance, is this a strategy that fits into the overall operating model of the business, and remains in line with BEPS?
If moving IP makes sense from a tax perspective, does it also make sense from a cost perspective?
The process of getting existing IP into the US from another country is potentially costly and difficult, which could trigger a different aspect of Tax reform such as BEAT.
And let’s not forget that although the headline cut in corporation tax represents a big incentive, the fact is that the US tax rate is still higher than in many other countries around the world.
Ireland attracts a great deal of IP thanks to its 12.5% tax rate. Other countries have a patent box for the same reason. But tax considerations are predicated on the ability to make money out of the products being invested in. Should decisions be based on the tax rate achieved when the product is commercialised? That might be six or seven years down the line. What if the project fails? There may be irrecoverable costs to account for.
Many companies will end up looking at the most tax efficient strategy within the first two to three years, when no profits have yet been generated. In this case, a generous R&D tax credit may come into play in the decision making. The US regime faces stiff competition with other jurisdictions in this area.
But perhaps the key consideration is that IP is just one aspect of value creation. Fixed or financial assets, manufacturing, supply chain, access to customers via your sales network and importantly management and ‘control of risk’ functions can all be important.
Above all, do you have a clear enough picture of where exactly your IP is, what it is, how it is created, and how valuable it really is in the context of your business, in order to make these judgements?
In the post-BEPS and US Tax Reform world, we recommend all multinationals perform an all-inclusive review of their value chain to better understand how value is created and how risks are managed. This is the best way to analyse your business in a way that helps draw conclusions on your optimal tax model.
Businesses need to make sure that they have a thorough and globally consistent analysis of what their IP is, where it exists and where it is managed.
There are three elements that businesses need to think carefully about when it comes to examining the value chain of their business.
Firstly, they need to map their business and identify all IP. This may sound straightforward, but the rules are changing. Some areas of IP are more obvious - like patents and trademarks - others less so, like relationships and know-how.
Secondly, companies need to evaluate the IP and its role within the organisation. This can be much more complex, and will often need a detailed analysis to explain the relative importance of different drivers of value. The role of the IP within the context of a multinational will change over time as an inevitable consequence of the business evolving year over year.
Thirdly, companies need to draw conclusions on what to do with the IP in the business and its role in tax structure. Businesses need to ensure an IP strategy considers the various available tax incentives, including those offered in US Tax Reform. Critically, compliance with prevailing international and domestic rules must be achieved. That means making sure that BEPS principles and US Tax Reform rules are fully adhered to. Of course, this may be easier said than done.
There is new and significant potential for double taxation wrapped up in the complexities of US Tax Reform as it relates to IP. The US rules around GILTI and BEAT are not designed specifically to align with the rules around BEPS.
Now more than ever a multinational’s IP strategy should live right at the heart of the commercial strategy for the business. IP assets will grow in value – and potential tax liability – as the era of Industry 4.0 ushers in technology such as AI, robotics and machine learning.
Only a thorough value chain analysis can give a clear picture of what to do now, and how to prepare for the future.