Archive | 2017, January | (2) posts

BEPS from an IP perspective

Part 1 – Introduction to BEPS for IP professionals

The focus on IP related issues is becoming increasingly more relevant as our economy is changing to become more digital and knowledge based. More are realising the potential of their intangibles and what commercial gains can be won if managed properly. The possible threats and costly consequences if ignored are also becoming evident in both large and small companies. A contributing factor to the latter is how IP is becoming a main character in the world of TAX through Base Erosion and Profit Shifting (BEPS).

BEPS is a practice enabled by, among other things, discrepancies in tax laws combined with aggressive tax planning by MNEs. The result is double non-taxation and reduced tax rates. The Practice is affecting development rates as it reduces tax revenues for certain countries.

The BEPS project is an effort to keep up with the dynamic market and knowledge base economy by the Organisation for Economic Co-operation and Development (OECD) countries. The result is a set of guiding action plans with different ways to tackle the problem of BEPS. Out of the 15 actions, action 8-10 of the report deal with Transfer Pricing (TP) and intangibles. More information about the different actions can be found here http://www.oecd.org/ctp/beps-actions.htm

Transfer Pricing is how goods and services are priced when they occur within an MNE group. An intra group transaction should be treated according to the arm’s length principle. The problem of adopting this principle when it comes to intangibles is the difficulty to define intangibles and how and when they are transferred. The previous guidelines have put an emphasis on legal ownership of intangible assets and this has resulted in the possibility to artificially shift profits through contractual arrangements like remuneration schemes and royalties.

In the new guidelines a mere legal ownership will not, on its own, justify any returns. The profits rendered from intangibles should rather be allocated based on what value contribution functions a group member and what risk they take in relation to the intangible asset and the transaction. The definition of intangibles is also broadened and a guide of how to deal with Hard to Value Intangibles (HTVI) has also been included.

The guidelines aim to improve the understanding on intangible assets and how they should be considered for the purpose of determining the correct pricing method and under what conditions the transaction occurs. For any large MNE the work in untangling these relationships will be vast and from an IP perspective several questions arise:

  • What are the main difficulties MNEs will experience as they start to unravel their IP ownership structures?
  • What resources and systems must be implemented in order to cope with the demand of clearly articulating their IP, rights to IP and how it is transferred?
  • The identification of risk assumption in relation to IP will be different in regard to what value contributing functions are undertaken, how is this practically operable when the understanding of IP is limited in the group?

Although there is a large risk of making errors when transfer pricing and aligning business and operations to the new BEPS regulations, there is also a lot to be gained in improving one’s understanding and controlling of IP.

AWA Strategy will release a series of blog posts addressing these issues, commencing with action 8-10 as the work to implement changes in alignment with the new guidelines is only just beginning.

Annelie Viksten, IP Strategy Associate, AWA Strategy

UK inches towards UPC ratification

There was a sigh of relief at the end of November when the UK announced that it would proceed with the ratification process to implement the UPC in spite of Brexit.  This renewed the hope that the UPC will come in to force in 2017 as planned.  Whilst this was good news, what did it actually mean for the timescales and where is the UK currently in its legislative process to ratify the UPC?

In order to look forwards, it may be helpful to take a look back to see what the UK has already done to ratify the UPC.  They were, in fact, fairly advanced in the ratification process before the result of the EU referendum put a spanner in the works.

In May 2014, the UK Parliament passed the Intellectual Property Act 2014.  This Act amended the Patents Act 1977 by inserting new sections 88A and 88B in order to introduce the concept of the UPC into the legislation.  These new sections provided that the Secretary of State may make orders to give effect to the UPC Agreement and that such orders must be presented to both Houses of Parliament (the House of Commons and the House of Lords) for approval before they are passed. The UPC was also designated as an “International Organisation” under UK law which allows it to be granted certain privileges, immunities and exemptions if required.

Following on from this Act, the Patents (European Patent with Unitary Effect and Unified Patent Court) Order 2016 was laid before Parliament in March 2016.  This order makes various amendments to the Patents Act 1977 in order to clarify the difference between a unitary patent and a European patent and applies and disapplies various provisions of the Patents Act 1977 (as appropriate) to unitary patents.  It is worth noting that this order was debated in the Houses of Parliament in March when confidence was still fairly high that the UK would remain in the EU.  Hansard (the record of parliamentary debates) shows that the House of Commons approved it in just 16 minutes and the House of Lords took only 24 minutes!

Since the UK’s announcement that it will continue to ratify the UPC Agreement, it has shown some progress by signing the Protocol on the Privileges and Immunities of the Unified Patent Court on 14 December 2016.  However, in order to implement this Protocol in the UK, it will need to lay a further order before Parliament for approval.  This order is currently being drafted but no draft has been published and there is no news on when it will be laid before Parliament.  I think what we can expect, when the time comes for the parliamentary debate, is that it will definitely not be as brief as it was for the last order.  What should be a fairly straight forward procedural approval may turn into a wider discussion on the UK’s role in the UPC, how it can function once the UK leaves the EU and whether the ratification should continue.

The UK also needs to deposit its instrument of ratification of the UPC Agreement with the General Secretariat of the Council of the European Union in order to formally ratify.  This will be prepared by the Foreign and Commonwealth Office but should be merely a formal step which will be done once the relevant secondary legislation has been passed.

There is still a lot of uncertainty surrounding Brexit, particularly with the ongoing Supreme Court appeal as to whether Parliament should be consulted before Article 50 is triggered.  The judgement is due this month and may give some clarity on the timing for Article 50.  As the UK is progressing with ratification of the UPC, membership is now likely to be one of the points of negotiation on departure from the EU.

Alicia Kim, Associate