South Africa: Tectonic Plates Shift On Cross-Border Intellectual Property Transactions

Last Updated: 25 June 2012
Article by Chris Bull

Most Read Contributor in South Africa, September 2018

In the space of one week we have seen two major developments in the way in which cross-border IP transactions are dealt with in South Africa.  These are developments that cannot be ignored by South African companies who have multinational operations.

On Friday, 8 June we saw amendments being gazetted to the Exchange Control Regulations confirming that cross-border transactions involving intellectual property are subject to exchange control regulations.  This was followed a few days later by the Organisation for Economic Co-operation and Development issuing its discussion draft on the revision of chapter VI of its transfer pricing guidelines dealing with intangible assets.

Any South African organisation involved in cross-border transactions involving the use of its intellectual property, needs to take cognisance of these developments.  They do not only affect transactions where, for example, there is a sale of a patent or a trade mark from South African entity to a foreign entity, but also have significant implications for South African organisations that have their patents or trade marks being used in other countries, whether under a formal arrangement or informally.  In many respects the less formal authorisation of the use of a brand or trade mark is more problematic.

The changes to the exchange control regulations bring much needed clarity to the issue of whether exchange control approval is required before a cross-border intellectual property transaction can be entered into.  The specific amendment that has been made to regulation 10(1)(c) of the Exchange Control Regulations, which comes into force with immediate effect, confirms the position that prior exchange control approval is required for cross-border transactions.  Interestingly, the regulation covers both registered and unregistered intellectual property rights.

What is also noteworthy about the amendments to regulation 10(1)(c), is that the regulation now covers a wide variety of transactions including sales, assignments, security interests and more broadly a "transfer of any intellectual property right".  From an intellectual property law perspective the language that has been used in the revised regulation leaves some distinctly grey areas when it comes to interpretation of the scope of intellectual property covered by the regulations.  For example, the use of the phrase "intellectual property rights" brings into play the debate as to whether know-how is an intellectual property right.  This remains an unsettled issue here in South Africa.

Likewise, the types of intellectual property transactions that are covered specifically by the new regulation arguably don't cover all of the forms of agreements that are common in cross-border IP transactions.  That having been said, we continue to advise caution on this issue, as was the position prior to this amended regulation being gazetted.

The draft revision of chapter VI of the OECD transfer pricing guidelines and the way in which they treat cross-border, intra-group licensing of intellectual property reflects the vigour and enthusiasm with which this issue is being approached by tax authorities around the world.  This is a "blind spot" for many South African companies, which focus on the registration of patents and trade marks in foreign jurisdictions without considering the important issue of how the use of these patents and trade marks is regulated around the group.

For some time, the area of intangibles in the context of transfer pricing has been one of the major battlefields by tax authorities and multinational enterprises world-wide.  This trend is now seeing itself being played out in South Africa.  Transfer pricing issues in relation to intellectual property and intangibles has resulted in some high profile international court cases on transfer pricing, such as the GlaxoSmithKline case with a purported settlement in the region of US$3bn.  South African companies with international operations are well-advised to get out ahead of this issue.

In the face of these two significant developments in South Africa's exchange control regulations and transfer pricing, it is easy to lose sight of the broader principles that need to be taken account of in any cross-border transaction involving intellectual property.  As with any other intellectual property transaction, there has to be careful consideration of the full range of intellectual property, tax, legal, competition law and regulatory issues impacting the transaction.  Simple deeds of assignment of patents, trade marks and copyright do not cut the mustard any longer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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