The real value of companies in today’s world lies in its intangible assets. Tech companies have almost no tangible assets, yet their valuations are sky-high. This is because tech companies make money by exploiting their intellectual property/intangible assets. Another class of corporations that are at the top today are consumer product companies such as Gucci, Horlicks, Kingfisher, and Starbucks. Although these companies have valuable tangible assets (such as plant & machinery, breweries, leather factories, retail outlets), their most valuable assets are their brands as these companies make high profits because of their brand use.
The process by which companies use their intellectual property to reduce or eliminate tax burdens on them is by a process called “Intellectual Property Migration” (IP Migration), where companies, mostly based in the U.S.A., relocate operations or intellectual property rights to various “tax havens” for the sole purpose of reducing the tax burden on them. It refers to creating a corporate structure in which income from harnessing intangible assets (such as intellectual property) accrues in tax havens or offshore financial centres. Tools/strategies used for these are generally called Base Erosion Profit Shifting (BEPS) tools.
The most famous of these BEPS tools might be the Double Irish with a Dutch Sandwich. Here, two Irish enterprises and a Dutch company are first set up. After this, profits are sent through to the main Irish organization, which are then paid to a Dutch organization. The profits are then moved to a subsequent Irish organization that has its central station in a tax haven like Bermuda, Nevis or the Cayman Islands. This broadly utilized procedure has given organizations a chance to bring corporate expenses to for all intents and purposes to a zero.
Be that as it may, utilization of these techniques can have negative effects on the economy, the overall population of the nation and the IP themselves. These techniques, for the most part, utilize home and host nations' tax frameworks. The interaction of these tax frameworks implies that an item of income can be taxed by more than one party, in this manner bringing about twofold taxation. This can also, likewise, leave holes, which bring about income not being taxed anyplace. Corporations have asked bilateral and multilateral co-activity among nations to address contrasts in tax rules that lead to twofold taxation and yet have misused those same practices to make sure that their income goes untaxed all over the place. This may result in an extra tax load borne by the overall population and millions of dollars in taxes lost by the government.
The Donald Trump administration had brought some out-of-the-box legislations that have become applicable from the Financial Year 2018; namely the GILTI (Global Intangible Low-taxed Income) tax and FDII (Foreign-Derived Intangible Income) tax. Under GILTI, income earned by American MNC groups in tax havens from intangible assets owned therein is to be taxed in America. So even if the royalty income accumulated in a tax haven does not face taxation in the said tax haven, the group will have to pay tax on that income in the USA. The FDII (the carrot) mandates that if royalty income from other countries is brought to America by maintaining ownership over intangible assets in American soil, attractive tax deductions will be provided on the royalty income.
The Government of India started to discourage IP Migration and incentivise owning IP in India via the Income Tax Act, in which Section 115BBF provides a concessional rate of taxation at 10% on royalty income in respect of exploitation of patents granted under Patents Act of 1970 and is only applicable to Indian resident who is a patentee (eligible taxpayer). Legislation like these can ensure that profits being made by corporations will be taxed and result in job creation and innovation in a company’s home country itself.
