Tax Auditors Look to Substance in Centralized IP Structures

Excerpt from August 2008 Issue of Practical US/International Tax Strategies by John Henshall (Deloitte & Touche LLP)

In the early 1990s the first businesses transformed corporate efficiency, and profitability, by taking a holistic view of their business and optimizing their supply chain networks—the complex web suppliers, production and R&D facilities, distribution centers, sales subsidiaries, channel partners and customers. Typically the best commercial structure involved a centralization of regional activity into “Principal” company supported by “contract” or “toll” manufacturers and “commissionaire” sales or “simple” distributors, supported by “shared service centers” to take care of back-office functions. Today most multinationals don’t derive a significant proportion of their profits from the physical act of making products but rather from the ideas they generate that lead those products, wherever products are made. As this state of affairs evolved so did the centralized business model and IP planning is now a signifi cant element in any business restructuring.

Business restructurings are by their nature an enormous strain on the organization and they are not undertaken purely for tax reasons. Tax is, however, taken into account when deciding where the centralized entity should locate; in most reorganizations high-tax countries then see high-profit activities moving away. These governments are fearful of the fiscal consequences of the more profitable element of their tax base moving offshore and will audit the transition vigorously.

Read More: Why Is Substance Important?

Intellectual Property Holding Companies: Tax Panacea or IP Mistake?

Excerpt from Practical US/Domestic Tax Strategies by Paul Dau, Paul Devinsky and Justin Hill (McDermott Will & Emery LLP)

Typical reasons for establishing intellectual property (IP) holding companies include (i) tax planning, (ii) protection in the event of insolvency, and (iii) administrative synergies, such as consolidation of legal costs. In reality the process of establishing and operating an IP holding company is far from trivial. By its very nature it brings together three complex legal fields, namely intellectual property, tax and insolvency. Moreover, the considerations that apply are usually multi-jurisdictional and therefore inherently complex. Oftentimes, IP holding strategies turn out to be optimized with one or more of the above legal fields more in mind than the others. Failure to assess properly competing economic and legal considerations in these complex international scenarios can lead to failure to meet objectives and runaway costs.

In many cases, the holding company is a subsidiary within an international corporate group. Sometimes, although less often, the holding company is the parent company of the overall corporate group. Adoption of a suitable structure depends to a large extent on the headquarter jurisdiction, the mechanism by which the various synergies are anticipated to operate, and on the circumstances of the particular scenario.

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