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NATL61_057 03/08/2007 10:02 AM Page 57 Flying offshore Intellectual Property The benefits of migrating your intangible assets. f a multinational corporation had the The hows and whys do so, the buy-in/buy-out payments must Iluxury of perfect hindsight, it would Tax authorities around the world have represent arm’s-length prices. make sure it migrated its intangible assets begun to target firms that have structured Buy-in options are valuable, since they well before those assets proved to be valu- their affairs so that profits are migrated to provide many opportunities with associated able. These companies, however, do not low-tax jurisdictions.As a result, multina- risks and must be reflected in the price. have such luxury, and the decision to tional companies need to ensure that doc- Subsidiaries must pay fair market value migrate assets often comes well after their umentation is sufficient to support the to buy in. Companies that fail to do so will value is realized. migration of valuable intangibles and the increase their risk of an un-favourable audit. An intangible asset is any asset that has profits they drive. no physical presence but nevertheless can Three methods commonly used to Sale of intangibles generate significant profits for a multina- migrate these intangible assets are cost- The final approach to migrating intangi- tional organization. Examples include sharing agreements, buy-in payments, and ble assets is through the sale of the intan- trademarks, trade names, manufacturing the sale of intangibles. We will examine gibles themselves. Intangibles are a major know-how, and intellectual property. each of these in turn. source of profits, and selling them to off- Migrating these intangible assets before shore affiliates ensures that the profits they become valuable requires the asset to Cost-sharing agreements (CSAs) generated from these assets’ sales are taxed be sold to related parties in a different tax CSAs are one of the most effective ways to in these offshore jurisdictions. jurisdiction at fair market value. migrate intangibles.A CSA is an agreement It is important, however, that this be Ascertaining that value often depends between two parties that states the contri- done at arm’s-length prices, and determin- on the asset’s stage of development, its butions each party will make in terms of ing the arm’s-length sale of intangibles is ability to generate future profits, and its costs expended and the associated benefits complicated. The most common way of remaining useful life. Tax authorities, that will be returned for such an investment. determining the price at which this should however, might not agree to the price at In order for a CSA to be effective, it must: be transacted involves the Comparable which the intangible asset’s owner has a. make business and economic sense; Uncontrolled Price methodology. This migrated it, raising the spectre of a tax b. include upfront and well-documented requires finding external comparables that dispute with various authorities around terms; involve the sale of very similar intangibles the world. c. indicate the costs incurred by each — often a difficult task to achieve. Accordingly,it comes as little surprise to party relative to the reasonability of hear discussions about government crack- expected profits; and Conclusion downs on tax havens, as more and more d. if providing entry, exit or termination Migrating intangibles to low-tax jurisdic- multinational organizations move profits of a CSA, involve arm’s-length prices. tions is beneficial for minimizing multina- offshore to low-tax jurisdictions. Companies that fail to draft effective tionals’ corporate taxes. However, the From a tax perspective, any financial cost-sharing arrangements increase their migrating process should ensure that the planning by multinationals that involves audit risk. functions performed, assets employed and moving profits offshore is justifiable if the risks borne are in the tax jurisdiction to corresponding functions performed, assets Buy-in/buy-outs which the intangibles are migrated. employed, and risks borne to earn these Buy-in/buy-out payments are another way profits are also shifted offshore. to migrate intangible income offshore.Buy- Dale C. Hill, CMA, is the National While implementing such a framework in payments require a party in a related- Transfer Pricing Leader in the Transfer Pricing is a long and complex process, it is bene- party setting to “buy in” to a cost-sharing and Competent Authority Group of Gowling ficial for all involved – if done correctly. agreement or “buy out” of one. In order to Lafleur Henderson LLP in Ottawa. MARS 2007 CCCA Canadian Corporate Counsel Association 57