‘Sharing the Pie’: Taxing multinationals in a global market
PhD student: Ms M.F. de Wilde
Promotor: G.M.M. Michielse
Duration: 1/1/2007 - 31/12/2010
PhD defence: Rotterdam, 15/1/2015
Searching for the origin of income from cross-border commercialisation of intellectual property; a comparative survey of the Dutch, US and Indian domestic and international income tax systems Property rights over intellectual achievements, or briefly intellectual property (IP), such as trademarks, patents, copyrights, know-how and trade secrets, are commonly recognized as a key value driver for business combinations. In todays globalised economy, the commercial significance of cross-border IP-transactions is enormous. Obviously, governments have a great interest in taxing the profits derived from IP-commercialisation. Countries are entitled to tax income from IP-commercialisation when its economic origin lies within their jurisdictional borders. Generally, when determining taxable profits, countries recognize separate legal entities as taxable units and also recognize legal transactions, even with respect to multinational enterprises (MNEs). Furthermore, countries commonly apply geographically oriented criteria (concepts of source and residence) to allocate and base tax jurisdiction. However, due to its intangible character, it is particularly difficult to allocate taxing rights to jurisdictions and tax income derived from IP accordingly. Especially in the event that cross-border IP-commercialisation occurs by (and within) a MNE, countries face severe difficulties in taxing the profits realized within their jurisdiction. Once created, intellectual property is highly volatile. It can be easily relocated legally from a jurisdiction to another through transfers of legal ownership or license agreements. Such transactions, however, are not necessarily combined with economic substance supporting them, but nevertheless entail tax implications. This may lead to an arbitrary allocation of the profits derived from IP-commercialisation. MNEs may benefit from this in their attempts to minimize their overall tax burden (e.g. by way of strategic profit-shifting arrangements and profit-extracting arrangements). Hence, it is necessary to seek alternatives to the current methods applied in taxing a MNEs global income from IP-commercialisation. One option in developing a sound (international) tax system may be to consolidate the MNEs global income from IP-commercialisation and subsequently divide these profits amongst the various jurisdictions in which the MNE undertakes business activities, for example by way of a formula (formulary apportionment). An alternative could be the global profit split method, where the MNEs income is consolidated and the profit is allocated to jurisdictions by application of the origin principle (developed by Kemmeren). This results in the following research question: is it possible and realistic to allocate taxing rights regarding a multinationals global income from intellectual property to a jurisdiction if that income originates in that state economically? For this purpose, the current systems applied in the Netherlands, the United States and India are scrutinized. The United States is chosen as this country has an extensive body of (anti-abuse) legislation in the field of IP-commercialisation. Moreover, the US is traditionally a huge exporter of IP. India, on the other hand, mainly is a great importer of IP. Obviously, this affects Indias tax policy and income tax provisions. Moreover, Indias income tax system currently is in a developing stage. The reason the Netherlands is chosen, is because of the researchers legal background and framework of reference. Notably, a consolidated global profit determination could very well be a utopian dream as States may not be willing to loose sovereignty in tax matters. Therefore, it may be necessary to scrutinize alternatives, for example consolidation of a MNEs income realized in the various economic regions (NAFTA, EU, ANDEAN Community, CARICOM, ASEAN). An example in this respect is the work of the European Commission with respect to the Common Consolidated Tax Base and the European Company.