A challenging international tax issue
Transfer pricing associated with the development and commercialisation of intellectual property presents some of the most challenging international tax issues faced by companies in a multinational group. This is complicated by the intangible nature of IP and the fact that IP is highly mobile and easily transferred from one country to another, unlike other assets like factories.
The use of IP as a means of relocating profit from one tax jurisdiction to another is well recognised by most revenue authorities and the OECD. The Australian Taxation Office noted recently a 95% increase in royalty payments made by Australian companies to international related parties in the past 10 years, compared with only 49% growth in payments made to Australian companies by international related parties. It identified the transfer of IP and associated royalty/licensing payments out of Australia as the single biggest risk to Australia’s tax base.
Companies need to ensure they are able to withstand the scrutiny of tax authorities and demonstrate that IP transfers are made at ‘arm’s length’.