Protecting intellectual property (IP) is a key priority for most tech businesses. What’s the right strategy to make sure your creativity isn’t misappropriated by others?
From a legal perspective, IP can be defined as ‘intangible property that arises as a result of creative or innovative activity,’ explains Vicki Strachan. From both a legal and tax viewpoint, the legal definition of IP also includes such ‘intangible assets’ as knowhow and goodwill. For tech businesses, finding the best way to protect that creativity or innovation comes down to appropriate strategy and management. Here we look at some of the key questions for tech businesses around protecting IP…
How does the law protect IP?
‘The specifics of legal provision depend very much on the nature of the IP,’ says Vicki, ‘but the legal framework for protecting IP always has the aim of rewarding the creator or innovator for their innovation without stifling the ability of third parties to be able to be creators and innovators in their own right. It’s about fairness to both the creator or innovator and third parties.’
Is the law flexible enough to cater for fast-moving innovators such as tech companies?
While the law is always slightly behind the latest developments, it has an in-built flexibility that allows it to adapt to new developments. ‘The legal framework is always open to interpretation and that interpretation is conducted by the court during court proceedings,’ says Vicki. ‘The legal precedent that defines the flexibility that will be allowed within the interpretation of that statute may always be a little bit behind current technology, but that doesn’t make computer-implemented or software-related inventions inherently unpatentable. There are some rules and regulations and interpretations that enable us to protect people’s innovation within that sector. The law may be a little bit behind where we are currently in technology, but it does have an eye for the way that technology is heading and is always trying to be flexible enough to protect innovators in the tech sector.’
Who owns your IP?
'Establishing and defining the ownership of IP is a big issue for businesses that has both legal and tax dimensions.'
‘From a legal perspective, understanding the ownership and maintenance of rights to intangible assets is vital because otherwise things like knowhow can go out the door with a valued employee, and confidential information and trade secrets can be inadvertently lost due to inadequate confidentiality policies or contract clauses,’ says Vicki. ‘All these things present challenges to tech companies, and indeed, most companies.’
From a tax perspective, understanding how intangible assets are protected and owned is often a key part to assessing and then optimising the tax outcomes associated with the development, exploitation or sale of IP, says Ross. ‘One of the big challenges for tech companies is that there are certain assets that might arise by virtue of the activities that the business is undertaking on a day-to-day basis. A lot of tech businesses that I work with struggle first to identify the assets that they’re creating, but then also to identify who the owner of those assets is, which can create some challenges from a tax perspective.’
A related tax issue can arise here if a business chooses to expand or restructure. ‘Sometimes you might have a reorganisation of the functions within a tech business, perhaps because the business has decided to approach the market in a different way or to organise its various parts slightly differently from an operational perspective,’ says Ross. ‘But when you undertake that restructuring, you might perhaps inadvertently move intangible assets along with the functions that you’re looking to move, which can then have tax consequences in terms of potential loss of value to one company. This may mean looking at whether one part of the company needs to be compensated from a tax perspective for that loss of value.’
How can businesses best prepare to mitigate IP risk issues?
Both our experts agree that forward planning is the best way both to de-risk the challenges and to maximise the opportunities of IP ownership. ‘From a legal perspective, it’s about identifying first of all what those assets are and how they’re best protected,’ says Vicki. ‘Then it’s about ensuring that the strategy around a development program matches the desired commercial outcomes of that program. Ensuring that the intellectual property protection strategy matches those commercial goals needs to be done as early as possible – and monitored all the way through the development process.’
Ross Robertson agrees. ‘So many businesses invest in IP and then worry how to manage it when it becomes successful. But the challenge is that it can often be very difficult at that point to optimise the value derived from the IP. And if you choose to change your approach at that point, then it can be cost-prohibitive from a tax perspective because you may now have a very valuable asset, with a significant cost associated with changing the ownership or strategy in relation to that asset. I always recommend that businesses think about their strategy with new IP, right through the life cycle of the IP, at the outset of the development programs. That means thinking about what their strategy is right through the development phase, through the commercialisation phase and through the potential access in terms of who owns that IP, how they’re going to protect it and how they’re going to exploit it. And the sooner they do that in the development cycle, the more likely they’re going to be in a position to be able to optimise their outcomes and minimise risks.’
Separating IP ownership from trade can be a quick win here that businesses often overlook, he says. ‘Using IP holding companies that are separate to the trading entities within the business can be helpful in ring-fencing what may be the most valuable asset in the business from inherent trading risks that sits within the business. In addition, from a tax perspective, there can be greater clarity and also potential benefit in owning your IP separate from your trade in terms of maximising the applications of potential release and incentives regimes.’
How does IP law vary in different parts of the world?
'The biggest differences tend to arise in the way that the intangible assets are protected are recognised,' says Vicki.
‘By intangible assets, I mean the things that can’t be registered, things like copyright and unregistered design rights. There have been some efforts to harmonise the law, with some success, but every country has its own law and may apply it differently to the way that it’s applied in the UK.
‘Statutes that appear to have very similar content may be interpreted differently in various jurisdictions. Even in our own country, our own courts interpret clauses in different ways depending on what particular court case they have in front of them that day. And the same goes for individual countries and individual judges, which means that the same or much the same statute or clause can be interpreted one way in the UK and very differently by a German court, which would then have to be followed in Germany. IP statutes are territorial, and if a company wants to take their ideas overseas, you need to ensure that you have a strategy as early as possible as to how to best protect that IP.’
What about tax and IP at the international level?
Tax-wise, the key principles may be similar at an international level, but there are plenty of differences when it gets down to the detail, says Ross. ‘At 30,000 feet, many countries around the world offer various reliefs and incentives for both the development and commercialisation of IP. It is generally viewed as a high value-adding activity in an economy, and therefore countries around the world are keen to incentivise businesses to invest in technology in their particular jurisdictions and to build all the associated development functions and high-value jobs that often circle around the IP in their jurisdictions,’ he says.
‘But the specifics of those particular reliefs and incentive regimes do differ quite dramatically from country to country. I think the major challenges in relation to IP from a tax perspective at the international angle goes back to ownership: it’s about getting clarity over who in the international group owns the IP and is therefore entitled to the profits from the exploitation of that IP, from a tax perspective, under transfer pricing principles.’
Another issue at the international level concerns cross-border trading. ‘When you’re starting to trade cross-border with your intangible assets, there are things to think about from a tax perspective, both on the indirect tax and the direct tax side of things. In some instances, that may purely come down to an administrative exercise of making sure you’ve obtained the right tax registrations – for VAT purposes, for example, when you’re exploiting your technology in another market. In other instances, it can be an absolute cost for the business; for example, through the application of foreign withholding taxes that might apply to certain payments that are common in tech businesses.’
The landscape continues to shift, however, which makes professional advice essential. ‘This continues to be an evolving area at the moment, with new types of taxes being introduced across the globe currently that target certain tech businesses, largely in response to the growth in businesses being able to remotely access economies in other countries through technology. I’d always advise that businesses take professional advice when they’re looking to exploit their IP across international borders to ensure that the outcomes that they're seeking are optimised and that the relevant risks can be mitigated.’
‘We’re in a really interesting environment at the moment, whereby you’ve got intangible assets often becoming an increasingly important differentiator and driver of competitive advantage, and so becoming more valuable for businesses. At the same time, we’ve got an international tax framework which has acknowledged that and is rapidly evolving in terms of how it approaches the taxation of intangible assets and is increasingly sensitive to the ways in which businesses are driving value in the modern economy. The way to manage that is to start with a clear understanding of what intangibles you have in your business and how they’re put to use by your business in driving revenues and ultimately profits through your commercial activities.’
This article was first published on plugd:in, BDO’s tech content hub – click here to visit.