translated from the French article published in “Les Echos” (november 2017)
After the “Panama Papers”, the “Paradise Papers” case highlights the well-functioning practices of tax evasion and tax optimization. These practices are regularly based on intangible assets (patents, trademarks…) management strategies. This article proposes best pratices to manage those assets and become more transparent about them.
As well as did the Panama Papers case, the “Paradise Papers” one highlights the well-functioning practices of tax evasion and tax optimization, which play on international legal voids. Tax optimization is in fact feeding a barely hidden economic activity. All professionals know how to pay less taxes, even if all of them do not act accordingly. It can be usefull to remind this !
The method of large international companies such as Google, Amazon and others is to develop a tax-saving scheme that consists mostly in declaring their income, and therefore to domiciliate it, in tax havens.
Since corporate income tax is based on profits and not on sales, it becomes difficult to calculate it when corporations have several entities in different jurisdictions and also have intangible assets (patents, trademarks, softwares…) which often strongly contribute to the core-value of their activity and allow to concentrate income streams in an advantageous way.
Some companies therefore choose to place those assets in a tax haven, while granting licenses to other group entities. These licenses generate a flow of income to the tax haven, that are weakly taxed. However, these assets have generally not been developed in the tax haven, because the R & D or marketing teams are most of the time not established in these countries. This is mostly why acting this way can be questionable.
The logic is as follows: what is not taxed remains in the company’s cash flow and enables reinvesting in R&D or better paying shareholders. Thus, being more innovative or more attractive to investors, « tax fugitives » stay a step ahead of companies that do not comply with such borderline practices.
These practices therefore generate economic inequality and unfair competition. This is a vicious circle since: to remain competitive with these giant corporations, many companies choose, when they can, to adopt the same game rule…
This tax deficit is then borne by those who do not escape, by choice or incapacity to do likewise. We are talking here about very small businesses, SMBs and any more traditional economic activity, which pay proportionally much more tax than their “big sisters”.
Will the European Commission, journalists and citizens defeat these borderline practices? How can we ensure that borderline companies contribute to the tax?
Many experts are working on these issues in order to find harmonization solutions for tax policies in Europe, and internationally, to regulate in one way or another such evasion schemes, to promote transparency, so that companies pay their taxes where they really generate profits.
In my practice of economic development through intangible assets, and financial valuation of intellectual property rights, I note every day the increasing value of this intangible capital for the economy and the companies.
My job leads me naturally to focus the debate on another approach, which could relate to a form of standardization of intangible assets management in companies, at least beyond a certain threshold of income and when the structuring of the activity involves many implantations and licensing mechanisms.
For example, an idea is encouraging large companies to keep a form of register of these intangible assets that collects, in a probative way:
- the documentation of the intangible asset genesis (patent, trademark, software): this can be translated into an excerpt from a laboratory notebook, the contextualized history of investments with associated evidence …
- related products and services
- cost accounting that tracks the associated investments and revenue generation of the products and services associated with each asset
- a follow-up of the related intellectual property rights
- a follow-up of the contracts (co-development, co-ownership, licenses …) related to it with proof of execution
- a summary reporting in the annual reports, which is addressed in particular to the shareholders, which describes the assets and their presumed value, in order to ensure transparency.
The introduction of these practices would certainly make it possible, beyond the adaptation of tax measures, to better justify accounting and tax practices, based on these assets, and their appropriateness.
It would also promote greater transparency in these asset portfolios, which are an important part of the economy and corporations value , but which are not necessarily highlighted in their annual reports.
Similarly, management excellence at this level could allow the creation of transparency and accountability labels regarding accounting and tax practices, which could become really soon marketing claims just as attractive for end consumers as environmental labels can be.
Sylvie Gamet, CEO of Finantis Value (intangible assets valuation)