Everald Dewar | Intellectual property and transfer pricing

There is a force sufficiently powerful to move the oceans of this world. It is a force not of earth - it is the moon, a mass with gravity large enough to pull the oceans, creating tides.

And just as tides are the rhythm of the ocean, transfer pricing has become the rising tide in the world of taxation.

Currently, taxpayers are required to make disclosures of their connected party transactions for transfer-pricing purposes, and a selected many are required to carry out studies.

But, overall, we are in what can be described as the quiet storm. It is said that the Congo Basin in Africa is hit each year with more than 100 million lightning bolts - happening nowhere else on earth - and with the lighting comes the rain.

Jamaica's transfer-pricing legislation is its own weapon that will soon bring about a tax tsunami.

Usually, businesses see transfer-pricing transactions mainly in connection with the sale of tangible goods and traditional services between connected parties. The matter of intellectual property assets that have contributed to the growth of the global economy were perhaps given scant regard.

However, this asset can be very valuable and crosses all industries. It should be taken into account when obtaining meaningful transfer-pricing advice, but most entities, including multinationals, quite often do not fully appreciate intellectual property or maintain proper records of this. It is also not usual for companies within a group to go charging related entities for use of intellectual property.

When should an entity be charged for intellectual property granted to related parties? What gives intellectual property its commercial value and how should this be valued and charged for?

The starting point to consider is whether an independent party would be willing to pay for these rights in a comparable commercial transaction. If the answer is yes, then the company that is the owner of the right must - on an arm's length basis - charge a connected or associated entity for its use.

It is important to remember that lawyers and accountants have different views of these invisible assets. Lawyers refer to intellectual property in the context of a legal right, whereas the accounting definition covers a wider area of non-financial fixed assets, which do not have a physical form but are identifiable and controlled by an entity.

Several categories of intellectual property arise, but the main four are trademarks, copyright, patent and design rights.

Domain names have unusual characteristics and fall more in the design rights category. Some domain names command a premium value and it is important that the registered owner may need to charge for its identified, licensed domain name, which enables the duplication or recreation in its website by intraparty entities.

When considering these arm's length matters, one must think of whether there are similar transactions with unconnected parties and, if not similar, whether adjustments can be done to make these transactions comparable. Consideration must be made also where there is no comparables available.

Dealing with these transfer-pricing issues is no cakewalk.

This writer is confident that there are going to be many obstacles and issues in assessing comparables and arm's length royalty rates.

A royalty is regular payment to the owner of an intellectual property for permission to use the rights and, where intra-company payments are made, the legislation requires that this payment must be at arm's length.

In this regard, most transfer-pricing specialists will use economic theory to value transactions, but it is becoming clear that the legal substance and commercial essence of any particular transaction will be very important factors. All professionals who provide transfer-pricing advice should have full regard to these considerations.

One other aspect is that many entities share facilities and do not charge for the assets being used or occupied by related parties. In this dispensation, they won't even bother to identify their intellectual properties in order to avoid charging for it.

However, it should be remembered that ignorance of the law is no excuse or defence. Tax Administration Jamaica can make adjustments for almost any assets that are not charged for but used by the connected party.

Our transfer-pricing regime is peculiar in that for most other jurisdictions and the Organisation for Economic Cooperation and Development, transfer-pricing guidelines do not require an entity to be affected by transfer-pricing rules, unless it has granted rights in a cross-border group transaction. Therefore, transfers between group companies within the same country would not be caught under those rules.

- Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston.

everald.dewar@bdo.com.jm