Intangibles

Brand

The most common intangible asset that we deal with is brand. In this context it needs to be recognised that while New Zealand may have 40m sheep it only has 4m consumers. This creates a very real constraint on the potential value that may be applied to brands and the consequent royalties that may be derived. A further issue that seems to be roundly ignored is that any substantial business carries with it goodwill. Attributing all intangible value to a brand can only be done by ascribing a nil value to goodwill. In the context of any well established business such a position is hard to support.

Identification

The most common way of identifying intangibles created locally is through close examination of R&D costs and remuneration data (high pay for special skills leading to greater value added/non-routine intangibles). We pay close attention to such data to ensure that due recognition is being given to the creation of valuable intangibles in New Zealand.

In common with the ATO, we are spending considerable time on issues involving the inbound licensing of intangibles. The intangibles need to be clearly identified and companies must be able to demonstrate that they add significant and substantial value if large royalty payments are to be substantiated. We are asking similar questions to those raised by the ATO in this regard:

1. Have all intangible profit drivers been individually identified (including goodwill and any licensed IP)?
2. What is the value of all intangibles owned and used by the company and have they been valued by a professional firm?
3. Is the IP protected?
4. Who bore the cost of creating the IP?
5. How and to what extent does the IP contribute to the profit?
6. Has any IP been assigned and if so what was the consideration?
7. How is the IP documented?
8. If a royalty is paid for the use of any IP, does the taxpayer produce appropriate profits for its functions, assets (including its own intangibles) and risks after payment of the royalty?

International royalty rates should be supported by robust contemporaneous analyses of future profits or cost savings from use of the intangibles. Rates should be routinely cross-checked to local bottom-line profitability. If a licensee is deriving only a normal rate of return or even less, why would the licensee bother to acquire the rights in the first place?

Find out more

For further reading on this subject, we recommend:

• "The New Zealand Tax Planning Report" article by Robyn Russell and Keith Edwards published in December 2004, and
• "The New Zealand Transfer Pricing Environment for Intangible Property" by Leslie Prescott-Haar and Keith Edwards published in October 2007 for the International Fiscal Association's Congress in Kyoto.

Date published: 02 Dec 2010

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