Revelations that tech giant Google paid just $74,000 in Australian taxes in 2011, despite generating around A$1.1 billion from local customers, have put the taxation of multinationals on the political agenda. Separately, the federal government has updated its 30-year-old rules on the way it taxes multinationals that shift profits between subsidiaries in different countries, known as transfer pricing. The new legislation, passed in August, is causing concern in the business community because it backdates the changes to 2004.
Although IP is an intangible asset, it is still located by companies in a physical place, which often determines which country’s tax regime it falls under. The location can be determined by the place of registration of the company or subsidiary that owns the IP, or by the country in which the IP is registered.
Walpole and Riedel’s paper investigates factors in corporations’ decisions about where to locate their IP, and how much of a role tax has played in this decision. The pair interviewed tax directors or senior tax managers of 20 IP-rich multinational companies listed on the London Stock Exchange in industries including pharmaceuticals, medical supplies, information technology, media, energy and manufacturing.
They discovered that while a country’s tax laws and tax administration was taken into account by corporations, it was not the primary factor in the location of IP. Walpole says the findings suggest that tax authorities can be overly suspicious that companies are making business decisions with the primary motivation of minimising their tax. “Tax authorities really need to understand that there are business dynamics at play and few of them have anything to do with tax,” he says.
The researchers found that only a minority of the companies they interviewed said they held valuable IP in countries where tax rates were low. “It would be difficult to say there was a trend to location of IP in low tax jurisdictions specifically for the purpose of transfer pricing to reduce the group’s tax liability,” the authors write. “Specifics of the businesses involved tended to override any opportunity for this on a widespread basis.”
Almost all of the 20 companies interviewed acknowledged that tax was a factor they considered when determining where to locate IP, but several said it was less important than other factors. Some said a commercial decision was made before tax had even been considered. “In such cases the tax department of the company is left to ‘catch up’ and perhaps to salvage a tax-effective outcome from the situation,” write Walpole and Riedel.
The researchers also examined transfer pricing – the price one company of a group of companies charges for use of products and services (including IP) that it provides to another part of the same group in order to calculate each division’s profits and tax obligations separately. Multinational companies also use transfer pricing to calculate how much tax they have to pay in the different jurisdictions in which they operate.
As with the consideration of tax rates, companies used transfer pricing for legitimate business reasons. “What I’m really trying to advocate here is that you should not have a knee-jerk reaction to a transfer-pricing arrangement, because it could be absolutely necessary and perfectly above board,” says Walpole.
Asset mobility
Reasons for transfer pricing include the need for cost sharing in large, expensive, multi-party activities; sharing access within the company to valuable patents or important marketing intangibles; the sale of products throughout the group of products created in a single or few locations; and securing a return for the head office.
