I am bringing you this Newsletter in Roy’s absence. He is currently away in the States for a couple of weeks and will no doubt be glued to the television watching the final stages of one of the most interesting elections of our times.
Having just returned from New York myself, I have been fascinated by the battle of personalities on the two sides of the presidential race. The power of Brand Palin has apparently caused a buying frenzy for her Japanese-designed rimless glasses, and wig companies worldwide are marketing hair pieces which copy her various up-dos. The face of Barack Obama, on the other hand, has become an iconic image. Indeed, one online emporium apparently has 1.1 million Obama designs for sale, including everything from T-shirts to baby bibs. Interestingly, on the same website, the McCain face appears on only 276,000 designs – in the image stakes, therefore, Obama has a significant lead.
In politics, clearly, image is paramount. We need only look to the UK where Gordon Brown’s natural lack of charisma seems to constantly haunt him, and to France, where the marriage of Sarkozy to the beautiful Carla Bruni has propelled them both to celebrity status and has no doubt helped her music career. IFS has particular expertise in advising well-known personalities (although no politicians, as yet) on the international tax aspects of the exploitation of their image rights. In so doing, we have worked on many occasions with our close friend and colleague, Adrian Shipwright, who has penned one of the articles below on this very subject.
The first article below, however, is concerned with a related subject – the taxation of payments in respect of intellectual property. The taxation of such payments will vary depending upon whether the initial transfer of the intellectual property rights for which the payments are made constitutes a licence or an alienation. Also, where Adrian has written about some of the taxation aspects of an individual’s brand in his article, I have also discussed in my article the brand of a company, and where this is located for tax purposes.
Our final article has been contributed by our colleague K.C. Li at MITCO. This features Mauritius and how this country may be used in international structuring for investing into Africa.
I hope you enjoy reading this Newsletter. If you would like to send us any comments you may have, please contact us at email@example.com.
Taxation of Payments in Respect of Intellectual Property: When can a Foreign Country Subject the Payments to Local Withholding Tax?
As Roy mentioned in our last Newsletter, we attended the OECD 50th Anniversary Special Conference in Paris last month. One interesting topic that was covered is the revised meaning of “royalties” under OECD Model-based tax treaties. As intangible property plays an increasingly important role in international commerce, this is a particularly relevant area for today’s international tax planning. In this article, I will firstly summarise one aspect of the revised meaning of “royalties” and will then discuss a connected issue – the situs of intangible property such as a company’s ‘brand’.
The Commentary to Article 12 now clarifies that payments made in consideration for the transfer of the full ownership of an element of property referred to in the definition of royalties cannot be treated as royalties under Article 12. Royalties by definition require that payments are made in consideration “for the use of, or the right to use” that property. If there is a transfer of ownership, the previous owner should not be charging for the continued use of the intangible property, and therefore any payment must be a capital payment taxable either under Article 7 (the business profits article) or Article 13 (the capital gains article). This charge will usually arise in the State of residence (although see Foster’s case below), as compared to when the payment is for the use of the rights, where the income may be taxed not only in the State of residence of the licensor but also in the State of source by way of a withholding tax (as may be reduced or eliminated according to the relevant treaty Article 12 if applicable).
At issue, therefore, is the actual nature of the economic entitlement. The Commentary to Article 12 states that each case will depend on its particular facts and will need to be examined in the light of the local intellectual property laws applicable to the relevant type of property and the local rules as regards what constitutes an alienation (not a particularly helpful comment). The form of documentation of the transaction is unlikely to prevent a licence being deemed an alienation, and vice versa. Generally accepted principles of international law will also be relevant in determining the true nature of the transaction – for example, the ‘Ramsay Principle’, which states that where a transaction has pre-arranged artificial steps which serve no commercial purpose other than to save tax, the proper approach is to tax the effect of the transaction as a whole.
To provide some clarity, the Commentary introduces the concept of “distinct and specific property” and states that if the payment is in consideration for the alienation of property that meets this description (which is more likely in the case of geographically-limited than time-limited rights), such payments are likely to be business profits within Article 7 or capital gains within Article 13 rather than royalties under Article 12. For example, the sale of software by way of CDs which give the purchaser the full rights to use the CD, being a distinct and specific property, without the requirement to pay the vendor for the regular use of the software contained in the CD, is business income to the vendor as opposed to a royalty receipt. However, if the vendor were to sell the rights to the software contained in the CDs to an entity which then paid the vendor according to how many CDs it manufactured and sold containing such software, the payment would be considered a royalty which could be subject to local withholding tax in the State of source (where the manufacture and sale is taking place).
Where a transaction involving intangible property gives rise to a capital gains tax charge, the situs of such property will be in point to determine which country has the taxing rights – the State of residence or the State of source. As intangible property cannot be geographically pinpointed in any one jurisdiction (being intangible), the situs is normally where the owner of the rights is resident, but this is currently a hot topic in the world of international taxation and was recently examined in the Foster’s case.
The facts of the case are, briefly, as follows. Foster’s Australia Ltd (Foster’s Australia) granted an exclusive right to its subsidiary, Foster’s India Ltd (Foster’s India) to brew, package and sell Foster’s beer in India and also to use Foster’s trademarks and intellectual property in India. Subsequently, Foster’s Australia and SABMiller executed a sale and purchase agreement whereby all proprietary rights and interest in Foster’s trade marks, brand and brewing intellectual property were transferred to SABMiller in India.
Foster’s approached the Indian Authority for Advance Rulings on its tax liability. The AAR held, in its ruling of 9 May 2008, that the income arising from the sale to SABMiller was chargeable to capital gains tax in India on the basis that Indian domestic law taxes non-residents on a transfer of a ‘capital asset’ located in India and that the relevant intangibles were located in India because this was the place of their use and development. Foster’s Australia has appealed the decision.
Our view is that this cannot be correct on the basis of the OECD observations above. The sale by Foster’s Australia to SABMiller was clearly a capital gain as opposed to a royalty, and the relevant treaty article is Article 13 of the 1991 treaty between Australia and India, which gives the taxing rights of such alienation of rights to the State of residence (Australia for Foster’s Australia) unless the rights form part of the business property of Foster’s Australia in India. Foster’s India (not considered to be part of the business property of Foster’s Australia but an independent entity) had an exclusive licence to use the trade mark in India for which they would have had to pay Foster’s Australia a royalty subject to Indian withholding tax. The recipient of that royalty would now be SABMiller, an Indian company which would indeed be taxable on such royalty income. I think the Indian authorities are trying to reach parts of Foster’s profits which other tax authorities are unable to reach – sorry, wrong beer!
IFS has been asked to advise recently on some interesting projects involving structuring the ownership of intangible property for impending sales or acquisitions, or for long-term asset protection purposes. If you would like further information on this, please contact us at firstname.lastname@example.org.
Tax and the Exploitation of Image and Reputation
“The purest treasure mortal times afford is spotless reputation…” Richard II Act 1 Scene 1
A person’s reputation and image can have considerable value and are something that others want to use to promote goods and services. This can give rise to difficult tax issues especially as these rights can be exploited internationally and so, of course, for structuring. An international footballer’s reputation and image, for example, can command large payments as can a celebrity’s notoriety in endorsing a product or service. Various magazines often pay considerable sums for the right to cover a wedding or other event such as a party. Photographs taken by paparazzi also sell for large sums. This raises further issues of privacy and the economic depletion of the person’s commercial ability to exploit their notoriety and who can use it. The protection given by legal systems of these rights varies. France, for example, has stronger protection of privacy rights. There is statutory protection of these “Image Rights” to varying extents in countries such as Australia, Germany, Italy and the Netherlands. Guernsey as part of its recent Intellectual Property legislation provides for image rights to be registered in Guernsey when the provisions are brought into force.
The UK does not recognise a generalised Image Right or Right to privacy (see e.g. Douglas v Hello!). The celebrity can sometimes have a remedy by using actions for passing off, malicious falsehood, trademark infringement and breach of confidence (see e.g. Tolly v Fry, the Princess Di photographs case, Irvine v Talksport and Douglas v Hello!) Notwithstanding this, image rights are dealt in every day in the UK and are acquired by employers (e.g. under the Premier League standard conditions).
For UK tax purposes image rights have been recognised as something different from a person’s employment (see Sports Club plc – David Platt and Dennis Bergkampf) and not giving rise to earnings but treated almost as personal goodwill. However, it is still essential to identify in any case exactly what is being exploited and paid for. This can control whether the acquirer can get a deduction (say as an intangible) or has to deduct tax on paying a royalty. A further difficulty is the identification of the location of the rights for tax purposes. Is it the forum for enforcement, the place the celebrity or rights owner is, or something else? This can be vital in the UK for non-domiciliaries and in countries with a territorial basis of taxation.
By tailoring the ownership of rights, for example, by segregating onshore and offshore rights, the return from the image rights can be maximised. The transfer into rights owning vehicles should be done as early as possible to minimise tax on transfer. Proper commercially justifiable valuation is essential. It is also possible to reduce the taxable profits of the rights owner, for example, by making appropriate payments to protect rights if there are infringements. Tax leakage can be minimised by choosing the rights that are exploited. For example, there is no UK withholding tax on the payment of royalties for the use of a trademark.
It is essential to have properly managed and run entities as well as good advice so the planning is not undone by bad documents and records and management. I have much enjoyed being involved in image rights planning with Roy and knowing that matters will be properly implemented. Notoriety as with other intangibles is a valuable new area for people to exploit in times of difficulty and uncertainty. It must be done with proper analysis, clear objectives and proper execution.
IFS would like to thank Adrian Shipwright BCL MA(Oxon) CTA(Fellow) AIIT TEP FRSA for the above article. Adrian is a Barrister (formerly a solicitor) at Pump Court Tax Chambers, Visiting Professor at King’s College, London, Member VPG, STPG, sometime Student in Law, Christ Church, Oxford and University Lecturer in Law (CUF) Oxford University and Professor of Business Law and Director Tax Research Unit, King’s College, London. If you have any comments on this article that you would like IFS to relate to Adrian, please contact us at email@example.com.
Mauritius: A Gateway to Africa
The 1970s was the decade for international development within the European Union, and the 1980s the decade when the US expanded its domestic market to encompass new markets in Europe and elsewhere. The 1990s was the decade of the ex-Soviet Union countries opening up their borders, whilst the 2000s has seen China and lately India becoming the new powerhouses of international business. We believe that the 2010s will witness an African economic boom as the last major marketplace which has not yet seen the global development of other Continents, and in Mauritius the nearer-home base which will be used as the stepping stone of structuring acquisitions and new business opportunities in Africa.
Why? Firstly, Mauritius is the only financial services centre which is a member of all the major African regional organizations, such as the African Union, Southern African Development Community (SADC) and Common Market for Eastern and Southern Africa (COMESA). In fact, its neighbours consider it simply as an African country rather than a so-called tax haven, and this makes it the preferred, recognised and tax efficient route for investments into Africa.
The membership of Mauritius in the various regional African trading blocs gives access to some 400 million consumers, creating a regional market worth US$ 360 billion. The implementation of the SADC Trade Protocol started in the year 2000 with the gradual elimination of customs duties on 85% of tariff lines by 2008 and with tariffs on the remaining ‘sensitive products’ being eliminated by 2012. Thus, Mauritius opens doors to huge opportunities for trade, services in all fields and investments and makes it a natural gateway to African countries.
Double Taxation Agreements (DTAs)
In addition to the preferential trade arrangements and other favourable Protocols on communications, logistics and capital flows within the region, Mauritius currently has 33 DTAs, among which the following are with African states:
- South Africa
Other DTAs which await ratification include Malawi, Nigeria and Zambia.
Under these treaties, there will be no capital gains tax payable in the African states irrespective of the introduction of any eventual capital gains tax, if the recipient of the gains is a Mauritius company. On the other hand, there is no capital gains tax or exchange controls or withholding tax on outward remittances in Mauritius.
Furthermore, almost all African nations impose some withholding tax on dividend paid to non residents, the rate of such imposition ranging generally between 10% to 20%. All Mauritius tax treaties limit the withholding tax on dividend. The treaty rates are generally 0% or 5% or 10%, thereby creating a potential tax savings of 5% to 20% depending on the treaty partner country.
Investment Promotion and Protection Agreements – IPPAs
Mauritius has signed an IPPA with some 15 African member states.
The main purpose of an IPPA is to protect foreign investments from government interference with property rights in the form of expropriation, nationalization and compulsory purchase without proper compensation. In fact, it aims mainly at:
– Intensifying economic co-operation to the mutual benefit of the two contracting states.
– Creating and maintaining favourable conditions for investments by investors of one contracting state in the territory of the other.
– Promoting and protecting foreign investments of investors of one country against expropriation in the other country.
IPPAs are similar to bilateral tax treaties concluded between sovereign states and provide direct protection to both individuals and corporate entities present in one contracting state and investing in the other state. With the volatility experienced in Africa in the past, investor protection is absolutely vital and even more important than advantageous double tax treaty arrangements.
Africa in general is offering attractive opportunities to investors and private equity firms looking for good value and potential growth in asset and mining acquisitions. We believe that the Mauritius double tax treaty network combined with the IPPAs and many non-fiscal benefits offer substantial and unique advantages to investors going into Africa.
IFS would like to thank Mr K.C. Li for the above article. Should you require any further information on how to structure your investments into Africa through Mauritius, please contact Mr K.C Li, Chairman, Mauritius International Trust Company Limited on +230 210 4000 or email him on firstname.lastname@example.org.