Technology

Technology
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IP as a threshold issue for digital
economy taxation
Worldwide, tax authorities’ focus on IP is
intensifying. “The way countries look at
how IP is taxed influences the way we hold
and manage our intellectual property,”
says Bergmann, who in addition to
co-chairing the Silicon Valley Tax Directors
Group is also Vice President, Tax and
Treasury, at NetApp, Inc., a Californiabased
provider of computer storage and
data management.
Often IP is developed initially in one
country and transferred offshore for future
development in a tax-advantaged
jurisdiction, while being commercialized in
products and services that are sold in
markets around the world. Countries such
as Ireland, Luxembourg, Switzerland and
the UK have been competing to lure
multinationals’ IP and related development
and commercialization functions onto their
shores, using so-called “patent boxes”
or “innovation boxes” with favorable
tax terms and rates. Others have looked
at what is known as “stateless income,”
in cases where the IP licenses alone
have been relocated to zero-tax locations,
and begun to cry foul.
All of which leads to another emerging
trend in digital economy taxation. That
is, any notion of zero-tax. Stateless income
is now fading on the digital tax landscape,
while companies are considering more
onshoring of IP ownership together
with related development and
commercialization to countries with
favorable tax environments.
Silicon Valley issues urgent call for
US innovation box
In the context of this second trend in
digital economy taxation, the Silicon Valley
Tax Directors Group is pointing out to US
legislators that while other countries have
instituted patent boxes or innovation boxes,
the US has not. “I’d say the single most
important message to Congress today is
that US international tax reform, including
an innovation box, is urgent for this year,”
Bergmann says.
The urgency of Bergmann’s message
is conveyed in terms of US jobs, the future
of America’s R&D capacity and the
preservation of its tax base. The multilateral
BEPS guidelines and recent unilateral tax
“… US
international
tax reform …
is urgent
for this year.”
Jeffrey K. Bergmann
Vice President, Tax and Treasury,
of NetApp, Inc.
changes are making it more critical than
ever to revamp US tax laws, he says, given
America’s worldwide tax system (compared
to most countries’ territorial tax systems)
and its comparatively high corporate tax
rate (35%, vs. an OECD average of around
25%).
Otherwise, these converging pressures
will increasingly incentivize US companies
to develop and hold patents and other IP
offshore, as more countries join the ranks
of Ireland, Luxembourg, Switzerland
and the UK in creating patent boxes and
other IP-friendly terms and conditions.
In an era of enormous digital innovation,
the US risks seeing priceless IP ownership
and R&D jobs migrate from the US to
a range of other nations if it doesn’t take
immediate action, Bergmann says.
At the same time, an innovation box
could be a mechanism to mitigate the
“lockout effect” that the US tax system has
had on some expensive-to-repatriate
overseas earnings on IP, as his group’s
78 member companies have written to key
congressional representatives. Their
letters to Congress state that existing tax
laws effectively preclude companies with
IP abroad from bringing it back to the US.
Instead, they ask for an innovation box
with a lower tax rate — one that also allows
US corporations to treat a distribution
of qualifying IP from a controlled foreign
corporation as a dividend eligible for a
100% deduction, to allow IP held abroad to
be transferred tax-free to the US.
Key legislators are now circulating
a discussion draft to legislate the
creation of a US innovation box. And while
the US presidential election may impact
Congress’s ability to pass comprehensive
tax legislation and other measures,
Bergmann says there is increasing
receptivity to moving the innovation box
forward. “We think it’s urgently needed
this year,” he concludes.
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Taxable presence in a virtual world
The rules on what constitutes a taxable
presence in a country are also changing
rapidly as a result of the digital economy.
While the OECD BEPS Project has
been finalizing its approach to PE, some
member countries have moved ahead with
new taxes (e.g., the UK’s diverted profits
tax) or administrative procedures
addressing what they perceive as artificial
avoidance of PE, enabled by digital
economy business models. Other countries,
meanwhile, have proposed or declared
that a certain type or level of digital
business can constitute a “virtual PE”
in their country for tax purposes.
Frustration is leading some in the
private sector to question just how far the
proliferation of PEs will go, with all of
their attendant obligations for taxes and
compliance, and whether this trend
could only undermine the international
goal of advancing shared stakes in global
investment and trade.
Digitization ushers in tax transparency
Underpinning digital economy taxation
will be the OECD’s new country-by-country
(CbC) reports, due as early as 2017, for
2016 financial data in countries adopting
their use. (A group including Australia,
Canada, France, Germany, Japan and the
UK has already established such an
exchange.)
The CbC reports’ initiative calls for
comprehensive global operational
reporting by companies (including
coverage of all locations, legal entities and
branches of operation), to be shared
among relevant countries via government
information exchange mechanisms.
Digitally enabled themselves, the
standardized CbC reports are expected to
usher in a new era of tax transparency.
In some ways, greater transparency
in taxation has already taken center stage
in the competition among nations to
promote investment in their own digital
economies. Competing tax jurisdictions
44 EY – Tax Insights for business leaders №14