Intellectual property (IP) is a type of intangible asset held by businesses. It includes trademarks, patents, copyrights and more. Compared to tangible assets, identifying and calculating the value of intangible assets can be much more complex. When properly identified and valued, these assets help in creating or maintaining corporate value.
Intangible assets are extremely important to the organizations that own them. Their beneficial revenue streams are dependent on maintaining patent and trademark protection, and ensuring that trade secrets and know-how are privileged and confidential.
Assessing the value of IP domestically can be difficult, and the added complexities of international borders can present new complications for business leaders. Here are five key areas to understand before assessing the value of international IP.
Know the Fluctuations in the Value of Intangible Assets/IP Portfolios
When conducting an international IP valuation, it is important to consider both the macro and micro economic conditions. The monetary value of IP can fluctuate significantly and is dependent on such factors as industry trends and market competitiveness, both globally and within the specific economy in which the IP is being valued. IP valuations should be updated as the business expands into new markets and seeks to execute commercial agreements to sell, license or otherwise exploit the IP.
Understand and Select the Proper Market to Enter
It is critical to understand and select the proper market in which to exploit the IP. This requires identification of key competitors, vendors and partnerships. Businesses must determine whether a similar service or brand already exists in the specified market, what differentiates its IP from that of a competitor, and whether a need for the use of the IP even exists within the market.
The applicable tax rates will also have a significant impact on market selection. Most notably, the Tax Cuts and Jobs Act of 2017 (TCJA) has substantially influenced business decisions regarding the optimal jurisdiction for IP placement. [1] The TCJA reduced the corporate income tax rate to 21% and enacted two new regimes: Global Intangible Low-Taxed Income (GILTI) [2] and Foreign Derived Intangible Income (FDII). [3]
These changes in the law were intended to make the U.S. a more attractive market for IP placement and to discourage multinational companies from shifting their profits on easily movable assets, such as IP, from the U.S. to foreign jurisdictions or vice versa with lower tax rates. [4] The GILTI regime imposes U.S. taxes on income derived by certain foreign corporations owned by U.S. shareholders. [5] Accordingly, if a U.S. corporation transfers its IP to a foreign corporation covered by the GILTI rules, the income derived from the IP will not escape U.S. taxation (although the tax imposed will likely be at a rate lower than 21%). [6]
As a counterbalance to GILTI, the FDII regime provides for a reduced corporate tax rate on certain income derived by a U.S. corporation from foreign customers, including royalties and license fees, from the exploitation of its IP in a foreign jurisdiction. [7] Therefore, if a U.S. corporation holds its IP in the U.S., it may be eligible for a tax rate on the income derived therefrom that is less than the current 21% corporate tax rate. [8]
Conduct an IP Inventory
An IP inventory is the process of identifying the full scope of a business’s intangible assets, categorizing them by department or product, and assigning proper ownership to the intangible asset. This process helps clearly define the IP owned by the corporation and is imperative before seeking an international valuation. An IP inventory includes conducting a series of interviews and observations, cataloging each asset, analyzing the findings, identifying undervalued and underused intangible assets, then providing a future strategy to safeguard and utilize them.
Conducting an IP inventory is key in determining the geographic ownership of the IP and its influence on international operations and the potential flow of royalties. For example, if an entity operates and hosts its IP in a foreign market and the new market is utilizing the IP from the primary owner, then the hosting entity should receive royalties for the usage of the IP from the new markets.
Measure the Specific Risks of the IP
Similar to any other type of investment, IP will have a certain degree of risk. The risk related to the IP is captured by valuation experts through two considerations.
First, valuation experts estimate the discount rate, which is the consideration that the rate of return required by an investor is related to the perceived risk of the investment. [9] The discount rate requires valuation experts to identify and assess the systematic and unsystematic risks associated with a particular subject company or ownership interest.
The second consideration is the technological-specific risk. Intangible assets may include additional risks not measured by a standard discount rate. [10] One way to determine the technology-specific risk is through risk-related probability discount factors that can be identified by valuation experts through interviews with key officers, industry research and IP-specific research.
Maintain a Competitive IP Advantage
Finally, consider the country-specific or international IP protection applications and how they relate to your assets and the costs, along with the likelihood that you can maintain protection. Intangible assets, such as trade secrets, which can be imperative to maintaining an entity’s competitive advantage, must have some sort of protection in place to qualify as a trade secret. [11] These trade secrets ensure business continuity and can be vital to an entity’s future success.
Conclusion
IP and intangible assets are growing components of a business’s overall value. Knowing the value of your IP is paramount when determining whether your IP is deployed correctly throughout the organization. If the IP is across international borders, then understanding the tax implications of each geography is another important consideration for maximizing the IP.
[1] Tax Cuts and Jobs Act of 2017, Pub. L. No. 115–97 (2017).
[2] 26 U.S.C. § 951A.
[3] 26 U.S.C. § 250.
[4] The Tax Cuts and Jobs Act of 2017 reduced the Corporate Tax Rate from 35% to 21%. Corporate Income Tax: Effective Rates Before and After 2017 Law Change, https://www.gao.gov/products/gao-23-105384.
[5] 26 U.S.C. § 951A.
[6] 26 U.S.C. § 951A.
[7] 26 U.S.C. § 250.
[8] Tax Cuts and Jobs Act of 2017, Pub. L. No. 115–97 § 13001 (2017).
[9] Gary R. Trugman, Understanding Business Valuation A Practice Guide to Valuing Small to Medium Sized Businesses (5th ed. 2017), at 601.
[10] These risks may include, but are not limited to, the likelihood of successfully defending the patent family, the likelihood of customer acceptance, the likelihood of identifying appropriate vendors, and the likelihood of maintaining a competitive advantage.
[11] Trugman at 922.