Tag: Intangibles – Goodwill Know-how Patents

Australia finalises compliance guideline on intangibles migration arrangements – PCG 2024/1

17 January 2024 the Australian Taxation Office published the final version of its Practical Compliance Guideline PCG 2024/1 Intangibles migration arrangements. The PCG has previously been released in drafts as PCG 2021/D4 and PCG 2023/D2 Intangibles arrangements. The final version sets out ATO’s compliance approach to the tax risks associated with certain cross-border related party intangibles arrangements involving: restructures or changes to arrangements involving intangible assets (referred to as ‘migrations’ in the PCG) the mischaracterisation or non-recognition of Australian activities connected with intangible assets. Changes and additions included in the final version: further clarification of the arrangements in scope exclusion of certain arrangements (‘Excluded Intangibles Arrangement’) from the scope inclusion of a ‘white zone’ for arrangements that have been subject to previous ATO audit or reviews further explaining our compliance approach, including the engagement taxpayers can expect based on the compliance risks associated with an arrangement expanding the guidance allowing taxpayers to group intangible assets or arrangements to make it easier for taxpayers apply the PCG providing more information on the reporting requirements taxpayers can expect to complete the reportable tax position schedule. ATO PCG 2024-1 18012024 ...

Korea vs “IP-owner Corp” September 2023, Seoul Appeals Commission, Case no 2023-0250

“IP-owner Corp” had subsidiaries which used its intangibles in their distribution and manufacturing activities. The subsidiaries did not paid royalty. The tax authorities considered that they should have paid for use of the intangibles and added an arm’s length royalty to the taxable income of “IP-owner Corp”. An appeal was filed with the Seoul Appeals Commission. Decision The Appeals Commission dismisse the appeal and upheld the tax assessment issued by the authorities. Excerpt in English “1) Issue 1 a) A trademark holder has the exclusive and unrestricted right to use a trademark, and therefore, unless the trademark is economically worthless, the use of another’s registered trademark is considered to be an economic benefit in itself. It is economically reasonable for a trademark holder to receive consideration for allowing the use of its trademark, and it is an abnormal trade practice that lacks reasonableness to allow the use of a trademark without consideration. b) The applicant corporation is 20â—‹â—‹.â—‹. After applying and registering the trademark, it has been registered as the sole trademark holder of the trademark in question. However, although it was necessary to collect royalties for the use of the trademark, the applicant corporation refused to collect royalties without economic rationality, which is subject to adjustment of normal price taxation under Article 4(1) of the International Taxation Adjustment Act or denial of calculation of wrongful acts under Article 52(1) of the Corporate Tax Act. c) Accordingly, we find no error in the original decision of the HMRC to deny the applicant a corporate tax credit. 2) Regarding Issue 2 a) The applicant company argues that the technical fees at issue should not be disallowed to the applicant company. b) The manufacturing technology of â—‹â—‹â—‹â—‹, which the Applicant has developed for a long period of time by establishing a research and development team, constitutes non-public technical information, and the head of the research and development team and then the factory manager of the Chinese subsidiary stated that the research and development team’s findings played an important role for the Chinese subsidiary. The internally drafted contract stipulates the provision of drawings, etc. as technical information, and the amount of royalties to be received from the PRC corporation was considered to be about 3 to 4 per cent of the PRC corporation’s sales. c)The fact that the applicant transferred technical information and technical know-how related to the â—‹â—‹â—‹â—‹ product to the PRC corporation and did not receive royalties in return is subject to taxation adjustment under Article 4(1) of the Law on International Taxation Adjustment, and the arm’s length price was reasonably calculated in light of the substance and practice of the transaction. d) Accordingly, we find no error in the original decision of the tax authorities to deny the claim for corporate tax credit to the applicant.” Click here for English translation“ Click here for other translation Korea 2023-0250 ...

§ 1.482-4(b) Definition of intangible.

For purposes of section 482, an intangible is an asset that comprises any of the following items and has substantial value independent of the services of any individual – (1) Patents, inventions, formulae, processes, designs, patterns, or know-how; (2) Copyrights and literary, musical, or artistic compositions; (3) Trademarks, trade names, or brand names; (4) Franchises, licenses, or contracts; (5) Methods, programs, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; and (6) Other similar items. For purposes of section 482, an item is considered similar to those listed in paragraph (b)(1) through (5) of this section if it derives its value not from its physical attributes but from its intellectual content or other intangible properties ...

India vs Heidelberg Cement India Ltd, March 2019, High Court, Case No ITA-125-2018

Heidelberg Cement India Ltd is engaged in the business of manufacturing of cement and sells them to its customers in India. A TNM method where all the transactions was combined had been used by the company for determining the arm’s length price of its controlled transactions as they were considered closely linked. Following an audit for FY 2010 2011, the Indian tax authorities issued an assessment of additional taxable income where the pricing of the transactions had instead been determined on a transaction by transaction basis. According to the tax authorities, technical know-how fees paid to the parent company were excessive. At issue before the High Court was whether the combined transaction approach as applied by the company or the transaction by transaction approach as applied by the tax authorities was the most appropriate method for determining the arm’s length pricing of the international transactions. Judgement of the High Court The court decided predominantly in favour of the tax authorities. Excerpt: “Under Section 92(1) of the Act, any income arising from ‘an international transaction’ was required to be computed having regard to arm’s length price. More than one transaction can be taken together for determination of arm’s length price only if they were closely linked. Aggregation of transaction or combined transaction approach is accepted practice for determination of arm’s length price, however, such aggregation of transaction can be allowed if they were linked with each other. As per the transfer pricing study report, the only statement made by the assessee is that the assessee is engaged in the business of manufacturing the cement which is its primary business activity and therefore, all the transactions relating to cement manufacturing activity should be bundled together for determination of their ALP applying TNMM as the most appropriate method. The services rendered by the AE are specifically mentioned in the agreement. Therefore, there is no reason that such services cannot be evaluated independently on standalone basis.” “The Tribunal also observed that it was the duty of the assessee to show with cogent evidence and factual analysis backed by economic reasoning and business that all the international transactions were originating from one source or they were independent or were part of package deal. Further, the TPO had not recorded any finding while 5 of 6 rejecting the claim of aggregating the transaction of the assessee. Accordingly, the Tribunal had rightly remanded the matter to the file of the TPO with a direction to the assessee to justify how international transactions were closely linked.” Click here for translation Heidelberg_Cement_India_Ltd_vs_Deputy_Commissioner_Of_Income_Tax_on_19_March_2019 ...

Switzerland vs R&D Pharma, December 2018, Tribunal fédéral suisse, 2C_11/2018

The Swiss company X SA (hereinafter: the Company or the Appellant), is part of the multinational pharmaceutical group X, whose parent holding is X BV (hereinafter referred to as the parent company) in Netherlands, which company owns ten subsidiaries, including the Company and company X France SAS (hereinafter: the French company). According to the appendices to the accounts, the parent company did not employ any employees in 2006 or in 2007, on the basis of a full-time employment contract. In 2010 and 2011, an average of three employees worked for this company. By agreement of July 5, 2006, the French company undertook to carry out all the works and studies requested by the parent company for a fee calculated on the basis of their cost, plus a margin of 15%. The French company had to communicate to the parent company any discoveries or results relating to the work entrusted to it. It should also keep the parent company informed of the progress of the transactions, directly or through the Company. The results of all studies became the property of the parent company. By an agreement of February 19, 2008, the parent company granted the Swiss Company access to the research and development activities carried out by the French company, in exchange for paying the parent company a royalty of 2.5% of all revenues generated on the products or registered by the parent company through the French company. In 2013, the Swiss Tax Administration informed the Company of the initiation of a tax assessment for the years 2008 to 2010, as well as a tax evasion attempt procedure for the year 2011. These proceedings resulted from a communication from the Federal Tax Administration that mentioned the existence of charges not justified by commercial use during the years in question. Later the same year the Tax Administration informed the Company that the proceedings were extended to the years 2003 to 2007. In 2014 a tax assessment was issued for the tax years 2003 and 2005 to 2010. The Tax Administration estimated that the Company had paid royalties to the parent company for the use of research and development of certain molecules. However, the latter company had no substance or technical expertise to carry out this activity. In practice, the research and development of the X group was led by the Swiss Company, which subcontracted some of the tasks to the French company. The amount of royalties paid by the Swiss Company to the parent company, after deduction of the costs actually borne by the company for subcontracting, constituted unjustified expenses on a commercial basis. The Swiss company stated that the parent company assumes important financial, regulatory and operational risks, for which it should be compensated. The Supreme Court concluded that the parent company was a mere shell company, and as a result, disregarded the transaction. The court found that the parent did not hold the required substance to be entitle to any royalty payments. The parent was not involved in the group’s R&D activity and had no/very few employees. It was not even the legal owner because the patents were registered in the Swiss company’s name. The Swiss company had 60 employees and made all the strategic decisions over the R&D functions. The Federal Tribunal ruled in favor of the Swiss Tax Administration. The Court found the transactions and payments to be a hidden distribution of profit leading to tax evasion. Click here for translation Swiss vs Pharma Corp2 ...