Taxation Of Licensing Agreements
In addition, under the relevant double taxation agreements, taxes on licensing revenues can be levied either in the licensee`s country or (in whole or in part) in the holder`s country. In the latter case, the contract sets a tax rate in the licensee`s country and includes a mechanism to avoid double taxation by placing the amount paid in the licensee`s country as part of the licensee`s tax obligations upon presentation of the corresponding documents. Double taxation agreements deal with the taxation of international transactions. Most double taxation conventions are based on the Organisation for Economic Co-operation and Development Convention and therefore contain a specific article on the procedure to avoid double taxation of royalties. In October 2007, the IRS published a Coordinated Issue Paper (CIP) for the Biotech and Pharmaceutical Industries, Nonrefundable Upfront Fees, Technology Access Fees, Milestone Payments, Royalties and Deferred Income Under a Collaboration Agreement (LMSB-04-1007-073). As of January 21, 2014, ICPs will no longer be mandatory for IRS auditors, but will remain available to auditors for consultation. The IPC deals with the tax treatment of advances, milestones and royalties under cooperation agreements between independent national parties in the pharmaceutical and biotechnology industries, usually for drug development. Cooperation agreements are common research, experimentation or development agreements, as well as agreements for the exchange of know-how or patents for research, experimentation or development purposes. Although Taiwanese law explicitly states that 20% of all licensing payments made by Taiwanese licensees are “withheld” from foreign licensees and paid to the authorities, the court found no reason why a Taiwanese company could not comply with the law by paying taxes in addition to licensing payments instead of deducting taxes from payments. The Tribunal found that Wistron had not provided evidence to the contrary and such a finding was supported by the pla language which required Wistron to make the payments in full and without deduction. The IPC contains two scenarios including appropriate analyses of the appropriate tax treatment for advance advances and milestone payments. While neither scenario presents facts that exactly match Mylan`s, the “Initial Reflections” section provides an interesting insight into the IRS`s treatment of these types of agreements.
The IPC states that, when considering these agreements, reviewers should first check whether the agreement involves the sale or licensing of intangible assets, as this could result in “dramatically different tax consequences.” The IPC also states that Mondis v. Chimei-Innolux (“Innolux”) concerned the same NPE and Innolux, another Taiwanese manufacturer of consumer electronics products. In this case, there was no licensing agreement.