Intellectual Property: A Few Thoughts on Tax and Exchange Control

• Pages: 1-18
• Author: Tracy Gutuza
• Citation: (2016) IPLJ 1
• Date: 24 May 2019
• Published date: 24 May 2019

INTELLECTUAL PROPERTY: A

FEW THOUGHTS ON TAX AND

EXCHANGE CONTROL



Associate Professo r, Faculty of Law, Univers ity of Cape Town

 

The role of intellectual property ownership structures in both exchange

             

country and locating income in a low-tax jurisdiction, is continuously under

scrutiny by the aut horities.

In recent years, intellectual property, as a component of intangibles,

has attracted the attention of tax authorities as one of the tools used in

tax-avoidance schemes.1 Internationally, the Organisation for Economic

Co-operation and Development (OECD) has published discussion documents

              

transfer pricing aspects of intangibles.2 The lead by the OECD has been

followed in South Africa by the appointment of the Davis Tax Committee.3

In particular, multinational enterprises and their global business structuring

             

one of the tools to avoid or reduce the payment of tax in cer tain jurisdictions.

These structures generally place the owner of the intellectual property in a

low or no-tax jurisdict ion and then license the use of the intellectual prop erty

to subsidiaries and other r elated entities.4

 

1 The term ‘tax avoidance’ is used in the context of both lawful and unlawful tax-avoidance

schemes where th e latter scheme fall s within the par ameters of the anti- tax-avoidance provision s

in tax legislat ion.

2 See for example, TheOECDActionPlanonBaseErosionandProfitShifting, (2013) OECD

Publishing , Paris, available at htt p://dx.doi.org/10.1787/9789264202719-en; (accessed on 27 Ju ly

2015); OECD Action Plan 8: the OECD Action Pla n on Base erosion and Pr ofit Shifting , available

at oecd.org (access ed on 11 April 2016).

3 Davis Tax Commit tee, available at www.taxcom.org.za (accessed on 27 Ju ly 2015).

4 See Avi-Yonah, R ‘Corporat e Taxation and Cor porate Social Responsibil ity’ (2014) volume 11

New York Universit y Journal of Law and Busine ss 1 where the case study of prof it-shifting by

Caterpil lar Inc is analysed . The restruc turing of the Cat erpillar Cor poration in the USA h as been

questioned in r elation to the separat ion of its intellectual pr operty from its ac tual operations. I n

South Afric a, the struct ure of South Afric an Breweries Corp oration, in par ticular its intel lectual

propert y ownership, has als o been implicated i n transferr ing its intellect ual propert y from South

Africa to t he Netherlands and u sing offshore str uctures to tr ansfer funds, i llicitly, so it is alleged,

from Africa to these offshore jurisdictions. See also http://www.actionaid.org.uk/tax-justice/

the-sabmiller-guide-to-tax-dodging (accessed on 27 July 2015 and the African Union Report

on IllicitFinancialFlows: ReportoftheHighLevelPanel, available at http://www.uneca.org/

publications/illicit-financial-flows (accesse d on 27 July 2015).

1

(2016) IPLJ 1

© Juta and Company (Pty) Ltd



line of tax authorities for their role in the reduction of the tax liability of

multinational enterprises, but they are also in the purview of government’s



countries.5 In the South African context, the Exchange Control Regulations,

which regulate and impose restrictions on the cross-border transfer of funds6

have been amended to include intellectual property as ‘capital’ for the

purposes of exchange control. This amendment was the result of the decision

of the Supreme Court of Appeal in Oilwell (Pty) Ltd v Protec International

Limited.7

to other countries has also been recognised by the African Union, using the

8

A number of questions arise i n relation to the scruti ny of intellectual propert y

in the context of tax avoidance and the cross-border movement of funds. The



the second relates to the elements or features of intellectual property which

assist or support this use; the third asks what, if any, measures are being put

in place to prevent this use (or abuse) and lastly, whether these measures are

successful in preventing this use. This ar ticle does not seek to answer all the

above questions. A complete answer would require detailed analyses of the



research, all of which is beyond the scope of thi s article.

The objective of this article is to highlight some of the tax and exchange

control issues, in particular their overlap, which arise in South Africa on

the cross-border transfer of intellectual property as a capital asset. It does

not purport to provide a detailed analysis of all the relevant issues. To set

the scene and provide context, the article will commence by setting out the

background to the cross-border transfer of intellectual property, in particular

as a capital asset. It will then c onsider intellectual property, as a capital asset,

in the context of the South African Exchange Control Regulations and tax

legislation. It is this emphasis on intellectual property as a capital asset that

limits this ar ticle’s discussion on the taxation of royalties.9 As there is a view

              

5 This statement is made in the context of countries which do not necessarily have exchange

control regu lations or provisions.

6 Curr ency and Exchanges Act 9 of 1933, read toge ther with the Excha nge Control Regulat ions GN

No R 1111 of 1 December 1961 and amende d up to GN No R 445 in GG No 35430 of 8 June 2012

(‘the Exchange Control Regulations’).

7 Oilwell (Pty) Ltd v ProtecInternationalLimited2011 (4) SA 394 (SCA).

8 AU report on Illicit Financial Flows (n4). The report uses the terminology ‘illicit financial

outflows’ and wh ile this terminology ap pears to refer to elements of illeg ality, the term in the

context of the AU report appears to include tax avoidance which is not illegal but legal and

allowed, provide d that it is not caught by the provi sions of the Income Tax Act 58 of 1962 or the

common law (substa nce over form doctri ne).

9 Th is means that the discu ssion on the withholding ta x on royalties provided in Par t IVA of the

Income Tax act (n8) is limite d. This limit ation does not mean th at this section and t he definitions

are without proble ms. In fact a discuss ion of the problematic natu re of these definit ion is worthy

of a separate ar ticle.

2 South African Intellectual Property Law Journal (2016) 4

© Juta and Company (Pty) Ltd