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Tax benefits should not be the main purpose for the creation of
an intellectual property holding company, as the South African
Revenue Service (SARS) will simply strike such a structure off the
"The tax tail should not wag the commercial dog," said
Okkie Kellerman, tax director at Edward Nathan Sonnenbergs (ENS),
the law firm, at a seminar on Tuesday on tax, exchange controls and
transfer pricing considerations relating to intellectual property
Tax considerations relating to cross-border IP transactions have
expanded, ENS warned. So has the general approach to IP, evolving
from the mere registration and protection of trademarks to include
critical questions about who the different parties are in a sale or
transfer of rights, the value of the assets and what exactly is
Companies should therefore consider all the benefits of creating
a separate IP holding company, not just the tax benefits.
Chris Bull, a director at ENS specialising in intellectual
property, said a group's tax exposure could be reduced within
an IP holding company, where the group would get tax relief if
intellectual property was sold or transferred within a group of
companies. Only once the rights of use or the IP assets are sold
out of the group will capital gains tax be triggered.
Mr Bull said other benefits of creating a separate IP holding
company included the bundling of the intellectual property in an
appropriate vehicle for a financing deal such as securitisation, or
ring-fencing intellectual property from operational risk.
Mr Kellerman said the acid test for the pricing of IP
transactions within a group of companies was the
"arms'-length principle", where the price paid by
subsidiaries of the group was similar to the price a buyer
unrelated to the group would have paid.
He referred to the GlaxoSmithKline (GSK) matter where tax
authorities fined the pharmaceutical group about $4bn after
settling a dispute of many years about the transfer prices its US
subsidiary paid its parent for drugs.
Mr Bull said SARS was quite sophisticated in its dealings with
intellectual property. It employed skilled people who had worked at
IP firms in South Africa for many years. Companies should no longer
consider tax and transfer pricing issues regarding intellectual
property "glibly", he said.
SARS conducts registration searches around the world for South
African residents filing trademarks and patents in foreign
jurisdictions. A company opening subsidiaries elsewhere in Africa
should ensure that legal agreements in terms of the rights of use
of its brand names and IP are in place, Mr Bull said.
In many instances, he said, the alarm bells only rang once a
letter from SARS arrived asking for the legal agreements and
explanations of the transactions.
Originally published in BusinessDay, June 2012.
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Effective collaboration amongst government agencies, automation of processes and capacity building by tax authorities have always been identified by stakeholders as strategies for achieving an efficient tax system.
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