Sunday, August 27, 2017

DEMPE, The Elephant In The Room For Multinationals


At the 2012 G20 Summit in Los Cabos, participants raised concerns about multinational corporations (MNCs) using tax avoidance structures to exploit inconsistencies and gaps between different legal systems in order to shift profits to low-tax (or no-tax) jurisdictions. The G20  charged the OECD with the responsibility of coming up with an action plan to avoid Base Erosion and Profit Shifting (BEPS).

The resulting Action Plan was adopted at the 2105 G20 Summit in Antalya.

On June 7th 2017, ministers and officials from 76 countries and jurisdictions signed a multilateral instrument (MLI) that will allow rapid implementation of the BEPS actions into more than 1,100 bilateral tax treaties already in existence among the parties.

The only 3 OECD members to not yet sign are the USA, Brazil and Saudi Arabia.

What does this mean for IP owners?

Because IP accounts for the majority of enterprise value for MNCs, a simple shift in IP ownership can have a large impact in transferring profits (and therefore taxes) to other jurisdictions. The Action Plan paid special attention to the role of IP in base erosion and profit shifting.

The ramifications for IP ownership could be profound.

Action items 8-10 of the Action Plan concern the alignment of IP ownership within a jurisdiction and the value-creation activities. While the implementation details and interpretation may be subject to some dispute in future, one conclusion is that the mere ownership of intellectual property by an entity may not necessarily entitle that entity to the full income associated with the IP. It will be necessary to examine the functions of development, enhancement, maintenance, protection and exploitation (DEMPE).

Unless the firm is 1) carrying out the DEMPE functions, 2) assuming DEMPE risk and 3) applying assets in exploitation, it may not be entitled to benefit fully from the economic flows from the IP assets. Furthermore, the OECD insists these are not new rules - they are an interpretation of the current situation. In other words, the interpretation will be retrospective.

Firms with large IP holdings in low-tax jurisdictions will find it prudent to assess them in conjunction with their DEMPE functions, risks and assets committed to ensure alignment.


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