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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The capital of a successful business enterprise is generally composed of working capital, fixed assets and intellectual capital.
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