Tax and ad-spend

Will Railton
Follow Will
William Railton explores what the OECD’s BEPS proposals mean for marketers

THE OECD has released its last pieces of guidance to governments on tackling corporate tax avoidance, and intellectual property is in the firing line. The final Base Erosion and Profit Sharing (BEPS) report calls for multinationals to provide more information about their “intangible” assets, including patents, know-how and, crucially, brands. These have long been tax-deductible vehicles for shifting profits to headquarters in low tax jurisdictions like the Netherlands, Luxembourg and Ireland. With tighter rules around intellectual property, and companies like Google set to see their tax bills soar due to the chancellor’s separate diverted profits tax (DPT), what will the implementation of the BEPS proposals mean for the UK’s marketing industry?

Marketers for multinationals frequently produce advertising campaigns in one country to be used in a number of others. This can have tax implications, with the company’s foreign subsidiaries paying tax-deductible royalties to another division for using that work, thereby shifting profits to more generous jurisdictions. The BEPS proposals recommend that companies with a turnover of €750m or more disclose this “transfer pricing” between countries.

But the impact of the new rules will not be black and white, says Renata Ardous, senior BEPS specialist at Mazars. “The impact depends on whether this digital company has an operational presence in the country where the advert is being placed, and whether it generates income there.

“For companies trying to break into new markets, they might advertise through newspapers or YouTube to create a buzz,” she explains. “But the company may not actually be aiming to sell products there. The way BEPS is applied will be unique in each country, but determining the relevant jurisdiction will depend on whether the company is trying to effect market penetration, or simply build a global reputation without making sales.”

Of course, the issue of corporation tax more broadly has impacted how brands are perceived. Polls by YouGov revealed that the number of people naming Starbucks as their preferred coffee shop fell by a third when allegations about tax avoidance surfaced.

But since brands and other intellectual property can be used to shift profits to more favourable jurisdictions, BEPS may itself affect how brands are valued.

“BEPS will encourage the use of market research to establish where a brand’s value lies,” says Brand Finance’s Alex Haigh. “Intangibles like intellectual property are so unique to a business that the royalty agreements within one company can’t really be compared with another. Unique research must be conducted. In the case of Coca Cola, the bottle shape which is still creating value today was created in the 20s, but the amount spent on bottle shape in the last 10 or so years would not reflect that.”

However, BEPS will not change the value of a brand if its owner comes to sell it, thinks Alison Lobb, director in tax policy group at Deloitte London. “The tax compliance obligations and work to allocate the brand value for tax purposes within a multinational group will be far-reaching. But when a brand is sold, the purchaser’s commercial due diligence and the value placed on the brand by the seller will remain central, and the bargain struck between the two parties will determine the brand value at that point.”

The impact for IP related companies is unlikely to become apparent until the countries in the OECD implement the BEPS proposals in their own way. At the same time, online sales will continue to grow, and businesses may face tax demands on the same intellectual property in a number of countries. “Governments don’t want to create an environment where there is double or triple taxation,” says Ardous.