Exchange Control and IP - Nervous Celebration

There are a number of differences between working in IP in the United Kingdom and doing the same in South Africa (RSA). One of the biggest is the frequent need to understand the concept of exchange control and how it interfaces with IP (see my earlier post here, for example).

As most readers and any foreign national to RSA who has bought and sold assets in RSA will know, the requirement to obtain exchange control approval from the RSA Treasury is likely to find itself as a condition precedent/suspensive condition to that transaction. It is also trite that IP is an asset in the broad sense with the propensity, directly or indirectly, to create royalty streams. But it can be a real brain twister trying to reconcile legislation designed to control the flow of money first promulgated in 1961, the protectionist mindset of the local Treasury, the more liberal views of those dealing with IP and the nature of IP as an asset in all its registered and unregistered forms, in 2011. The latest RSA Supreme Court of Appeal judgement (Oilwell (Pty) Ltd v Protec International Ltd) illustrates this well enough.

Oilwell had attempted to reverse a trade mark assignment for failure to obtain exchange control. The leading IP judge in RSA (with the support of a full bench) dismisses the appeal. By doing so, he effectively challenges the Treasury to find another way of restricting the flow of IP from RSA. The case, summarised with comments on Afro-IP here, is seen as a victory for those who advocate freedom of exchange and a relief to advisors who had not, as a practice, advised clients to seek exchange control for IP assignments. However, before you get on the dance floor be warned ... there is a strong feeling that the Treasury may turn down the music.

Posted by Darren Olivier to IP Finance

SA reducing incentives for intellectual property outflows

In an article for Moneywebtax.co.za Clayton Bonnette explains how the introduction of S231 of the South African Income Tax Act seeks to squash so called "intellectual property arbitrage".

"It is not uncommon for intellectual property rights (IP) to be developed by one group company and subsequently transferred to another group company on arms length terms. The reasons for transferring IP between group companies are generally not only motivated by the possibility of reducing royalty withholding taxes. There are non-tax reasons too and these include ensuring that the continued development of the IP takes place where the necessary technical skills can be found and that the jurisdiction from which the licensing of the IP takes place is "credible". The "credibility" of the jurisdiction not only facilitates the international exploitation of the IP but also increases the possibilities of raising additional capital to fund the ongoing development expenditure.

The perceived resulting loss of tax base in the country in which the IP was initially developed has resulted in a number of tax administrations carefully scrutinising these types of arrangements. In order to counter so-called "intellectual property arbitrage", section 23I was introduced into the Income Tax Act, no 58 of 1962 (ITA) by the Revenue Laws Amendment Act, no 35 of 2007.

Section 23I, which comes into operation on January 1 2009, places restrictions on the quantum of the royalty payments to non-residents (payee) that a South African taxpayer (payor) may claim as a tax deduction in certain circumstances.

The mischief that section 23I broadly seeks to cure is to deny or restrict the tax deductibility of the royalty expenditure incurred by a payor, where the royalty is payable to a payee that is a non-South African resident for the use of IP that was either originally owned by a South African resident or was created or developed in South Africa."

South African: IP Tax/Exchange control issues

The SA Treasury has embarked on a project to:

- ensure legitimate IP transactions are not unnecessarily complicated by tax
- ensure that tax consequences flowing from common IP transactions are logical and expected
- gauge the impact of our Exchange Control Regulations on IP transactions
- identify “negative” IP tax practices and existing / potential loopholes

In doing so they have called for comments on the legislation, more fully described on Afro-IP here.

The blogger is looking to compile a list of countries that have onerous exchange control provisions relating to IP and would welcome additions from readers.

Pharma investment in South Africa -- climate survey

Writing in Moneyweb today, Eustace Davie (Free Market Foundation) reviews the economic and regulatory climate facing pharmaceutical companies thinking of investing in South Africa. His article, "Attracting pharmaceutical investment to South Africa", cites figures from a recent Deloittes report which showed that in 2006 the South African economy derived a direct investment benefit of some R10 billion from the pharma sector. The tax revenue alone generated R1.6 billion. Capital investment contributed R1.8 billion. He adds:

"Pharmaceutical research and development (R&D) could make an even greater contribution to SA’s economic growth. Unfortunately the potential for growth is being hampered because government health care regulators do not appear to have the same appreciation, or interest, as their colleagues dealing with science, technology, trade, industry and finance, in the role that innovation plays in competitiveness and economic development.

...

A lack of skills and slow regulatory approval for new medicines are among the most pressing problems facing the pharmaceutical sector. SA should take deliberate action to expand current R&D expenditure by, for example, tailoring the regulations for pharmaceuticals and particularly for clinical trials to fit that purpose. SA was in the lead just five years ago but now clinical trial development is growing much faster in India and China".

While he concedes that South Africa has adequate IP protection, he observes that there is no mechanism for extending the patent life of a pharmaceutical product whose effective patent term has been reduced by delays in the registration process. In conclusion he observes:

"It is not for the comfort and benefit of investors that governments provide patent protection for pharmaceuticals, regulatory environments conducive to ease of doing business, and other conditions intended to make their countries attractive investment destinations: it is for the benefit of the country’s citizens. In the case of pharmaceuticals it is to improve access to medicines, jobs, skills, technology and all the other benefits that citizens can derive from the presence of a large and thriving pharmaceutical manufacturing industry".