Taxation of intellectual property in cross border transactions within multinational groups

Abstract

A significant portion of the global profits earned by multinational enterprises (MNE) gets attributed to the Intellectual property such as technology and brand name owned and deployed by them. As globalization signalled the fragmentation of production processes leading to spreading out of production bases, there has been a significant spurt in the cross-border movement of IP. Taxation of IP is a difficult proposition even under static circumstances as IP, being an intangible asset, is difficult to locate, quantify and value. The difficulties increase manifold in a cross border transaction involving overlapping taxing rights of multiple countries. The present paper analyses the question of taxation of IP against the economic and legal context of international tax regime. Tax incidence on licensing and transfer of IP has been studied within the framework of domestic law as well as global tax conventions such as OECD and UN Model tax conventions. Special focus is on the Transfer Pricing Issues regarding use and transfer of IP. The three methods, namely CUP method, TNMM and Profit Split Methods are chosen as most suitable for IP transfers. The challenges in implementing these methodologies for assessing the contribution of IP towards the profits generated by an MNE are highlighted. The paper also points to the silent but grave issue of migration of IP leading to erosion of tax bases. Such migrations happen during the course of business restructurings wherein IP owned by different group concerns get centralized with earmarked IP companies located in tax friendly jurisdictions. Similarly IP generated by Research and Development units located in developing countries like India gets routinely transferred to affiliates without ever being acknowledged let alone remunerated. The paper contains two case studies one on attribution of profits to different types of IP and another on structure and dynamics of cross border supply chains. The paper concludes with suggestions for policy responses in the realms of legislation, regulation and tax administration towards protecting our indigenous tax base.