September, 2008: The issue of Intellectual property and taxation has gained much importance in recent days. The famous ‘rocket scientist’ Wernher Von Braun, once said that his two greatest problems were gravity and paper work. In today’s time the greatest problem of a business man is taxation, which is pervasive as gravity and also involves lot of paper work. In case of transfer of any IPR either by way of licensing or by way of assignment, the income from royalty or the value of sales on transfer of technology involve lot of issues for withholding tax, applicability of VAT, service tax, stamp duty, capital gains tax and the transfer pricing regulations. All the different kinds of taxation are levied on the basis of the value of the IPR which is transferred or licensed and thus the question of IP valuation also become relevant whenever any transfer takes place.

The principles of arms length transactions are contained in 1995 OECD guidelines. Broadly, the related party or inter company transaction are looked closely by the taxation authorities with the market comparable data. In case of licensing of technology the arms length nature of the royalty maybe determined by comparing the arrangement with third parties by identifying similar transactions and the market price, thereof. In case of assignment, the valuation is also done on the basis of cost incurred by applying some profit margin on the same or on the basis of the income approach. The value may also depend on the remaining life of the patent.

In the context of Indian Taxation Laws, there are various provisions in the Income Tax Act which is allowed for claim of expenditure on patent and technical know-how over a period of years. The provision of charging depreciation on intangibles has also been introduced in the Income Tax Act. The issue of IP taxation is also relevant for payment of royalty and technical fees to non-residents, where one has to look the provisions of withholding tax under Section 195 and the accrual of income on such income under Section 9 of Income Tax Act vis-à-vis the provisions contained in the International Double Taxation Agreement of respective countries. In case of merger and acquisition the effect on transfer of technology including on other IPRs is tax neutral but the issue of IP due diligence, IP valuation and IP accounting remain very relevant.

It is also observed that the countries follow different kinds of tax policy for taxing the income arising from the performance of art, music and for creation of inventions. Sometimes it is found beneficial to register a company in certain tax shelters and/or tax havens where there are lower rates of taxation on intellectual property rights. Netherlands offers attractive tax rates on taxation of income derived from different kinds of intellectual property and attracts receipt of millions of dollar on this account from around the world.

ITAG specializes in various segments of determination of policies and ascertainment of liabilities on different kinds of technology transfer and suggests tax planning tools for its clients.

--Dr. D. R. Agarwal