9 th Meeting of AEG Economic Ownership of Intellectual Property Products by SPEs Michael Connolly Chair UNECE Task Force Global Production September 2014

Presentation Outline Review of TF Head Offices Holding Companies and SPEs Illustrative example Work of TF Global Production on Economic Ownership of IPP Recommendations

Royalty and Licencing Companies – TF Head Offices, Holding Companies and SPEs SPEs - Group receipts of royalties and licences Recognised as an institutional unit (SNA 4.61) Do these SPEs own the related IPP ? To reroute the receipts to the original owner - parent or originator of the IPP – difficulties caused by imputations

TF Global Production get involved “further clarification is needed on the (economic) ownership…of certain assets of SPEs …TFGP to put forward more concrete proposals” 8 th AEG Meeting, June 2013 Luxembourg

Consequences of recognising SPE as economic owner Capital formation increases in SPE country Trademarks, brands etc. are recognised as being owned by SPE Profits earned in one jurisdiction reduced by IP charges - effectively a rerouting of profits

MNE Rationale for Non-Resident SPE holding IPP SPE created for Tax planning purposes Double tax agreements Withholding tax agreements

MNE Structure (simplified) US Parent Dutch Company – IP Sub licences Cayman Irish registered non-resident- owner of IP Cayman Irish registered non-resident- owner of IP Irish Resident Trading Company Irish Resident Trading Company ROYALTIES

NETHERLAND S IRELAND Ireland imports Royalties Royalty Flows CAYMAN ISLANDS

Assessment of Royalty Flows Netherlands is little more than a conduit for these royalty flows Cayman is a passive holder of IPP Actual beneficiary is parent in US This issue not examined in depth by TFGP

TF Global Production Economic Ownership of IPP in MNE Groups Risks and Rewards of IPP –Risks – registrations, enforcing copyrights etc. –Rewards – Royalty and other fee receipts Difficult to observe transactions in IPP itself Compilers reliant on accounting data

Is unit member of a MNE group ? Did the Unit produce the IPP ? Main activity of the Unit ? Does the Unit receive income from IPP or pay for the use of IPP ? Decision Tree for IPP ECONOMIC Ownership

Economic Ownership of IPP in MNE Groups Following the decision tree should lead to decision on ownership Information may be scarce Importance of who prepares accounting records for SPE

Economic Ownership of IPP in MNE Groups Importance of Large Cases Units (LCU) Understand the MNE structure Cost recovery and transfer price agreements within MNE Legal rather than economic ownership

Economic Ownership of IPP in MNE Groups TFGP Recommendations IPP producers are owners of IPP –Unless sale of original to parent or subsidiary –Unless no IPP related turnover generated - control by parent –Without conclusive evidence assign ownership to IP producer Rerouting of ownership away from SPE /Royalty companies not recommended Assign economic ownership to these units A separate institutional unit is recognised and consequently de facto owner of IP assets Record these transactions separately

Economic Ownership of IPP in MNE Groups TFGP Recommendations AEG is requested to review the decision tree and the discussion points in Section 3 of the issue paper The AEG is requested to express their views on the recommendations of the TFGP as formulated in section 4