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The tax consequences of taxpayers of one jurisdiction restructuring their business operations to relocate intangible assets and high value services to other (often low- tax) jurisdictions have attracted considerable attention from tax administrations in recent years. Tax administrations in many jurisdictions are concerned that such restructuring may result in residual income, or asset value, being shifted outside their jurisdiction. To address these concerns, some jurisdictions have taken steps to subject relocations of intangible assets in certain cases to taxation at a level sufficient to serve as a deterrent.

However, it is not always clear when an intangible asset is being shifted, especially where intangible assets are embedded in service arrangements. In some cases, knowhow or trade secrets may be transferred from one enterprise to an offshore affiliate through the provision of “services” or by the secondment of highly skilled employees to the offshore affiliate. In these circumstances, there is arguably no alienation of an intangible asset for tax purposes, with the result that the transfer may not attract exit tax or post-transfer adjustments based on actual post-transfer performance. Nevertheless, there may be a considerable change in the profit potential of both enterprises as a result of these service arrangements.

None of the branch reports indicated that there were special rules in their country to deal with situations where an intangible such as knowhow was transferred to another enterprise through services, such as secondment of highly skilled employees.

However, in some countries, fees for such services would be regarded as fees for technical assistance which are subject to similar treatment to royalties.

In many countries, an analysis would be performed to determine whether there was in fact a transfer of intangibles, which might lead to royalty classification or give rise to an exit tax liability. In some countries, e.g. the UK, the tax authorities would be unlikely to reclassify fees paid for services as representing a payment for transfer of intangibles.

Branch reports suggest that most countries would simply apply their usual transfer pricing rules or where appropriate, their general anti-avoidance rules or controlled foreign company (CFC) rules, to deal with shifts in profit potential or asset value as a result of transfer of intangible assets embedded in contracts for the provision of services.


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