Intellectual Property: A Few Thoughts on Tax and Exchange Control

• Citation: (2016) IPLJ 1
• Pages: 1-18
• Author: Tracy Gutuza
• 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 proper ty ownership st ructures i n both exchange

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

country and locat ing income in a low-tax jur isdiction, is continuously under

scrutiny by the aut horities.

In recent years, intellec tual propert y, as a component of intangibles,

has attract ed the attention of tax author ities as one of the tools used in

tax-avoidance schemes.1 International ly, the Organisation for Economic

Co-operation and D evelopment (OECD) has published discussion docu ments

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

transfer pricing a spects of intangibles.2 The lea d by the OECD has been

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

In particula r, multinational enter prises and their global busi ness structu ring

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

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

These struct ures generally place t he owner of the intellectual prop erty 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 ‘t ax avoidance’ is used i n the context of both l awful and un lawful tax-avoid ance

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, T he OECD Action Plan on Base Erosion and Profit Shift ing, (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 Afr ica to these offshor e jurisdict ions. See also htt p://www.actionaid.or g.uk/tax-just ice/

the-sabmi ller-guide-t o-tax-dodgi ng (accessed on 27 July 2015 and the A frican Union Re port

on Illicit Financial Flows: Report of the High Level Panel, avail able 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 thei r role in the reduction of the tax liabilit y of

multinational enter prises, but they are al so in the purview of governme nt’s

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

countr ies.5 In the South Af rican context, the Exchange Contr ol Regulations,

which regulate and impose r estrictions on the cros s-border transfer of fu nds6

have been amended to include intellect ual propert y as ‘capital’ for the

purposes of exchange control. Th is amendment was the result of the de cision

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

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

to other countries h as also been recognis ed by the African Union, u sing 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 cr oss-border movement of funds. The

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

the second relates to the elements or feat ures of intellectual prop erty which

assist or support th is use; the third asks what, i f any, measures are being put

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

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

above questions. A complete answer would require det ailed analyses of the

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

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

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

control issues, in par ticular their overlap, which arise i n South Africa on

the cross-border tr ansfer of intellectual proper ty as a capital asset. It doe s

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

the scene and provide context, the a rticle will commence by set ting out the

background to the cross -border transfer of intellect ual propert y, in particular

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

in the context of the South Afr ican Exchange Control Regulations and t ax

legislation. It is this emphasis on intellect ual propert y as a capital asset that

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

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

5 This state ment is made in th e context of countr ies which do not nece ssarily have excha nge

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 Protec International Limited 2011 (4) SA 394 (SCA).

8 AU report on Illic it Financial Flows (n4). The rep ort uses the t erminology ‘i llicit fina ncial

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

context of the AU repor t appears to i nclude tax avoidanc e which is not illegal but le gal 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

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