US/AU structuring for R&D tax incentive

[Alex North]

Hi beachers,

A question that I hope some of you have answered for your own companies. We have a US parent company that raised US$ and an AU subsidiary. We would prefer to hold IP in the parent. We intend to build a majority of our engineering team in Sydney, one reason for which is to make good use of the Australian R&D tax incentive. How have you, or a company you're involved with, structured this for best outcome?

Variables at play include which entity makes the R&D claim, how money is transferred to the subsidiary (loan, capital, income, ...), and probably others.

There seem to be some unexpected tax traps, so I'd prefer accounts from companies that have actually done it. I'm sure they'll be useful for many others in the future, and of course I'm happy to report back whatever we implement.

Alex

[Clifford Heath]

> We have a US parent company that raised US$ and an AU subsidiary. We would prefer to hold IP in the parent. We intend to build a majority of our engineering team in Sydney, one reason for which is to make good use of the Australian R&D tax incentive.

> There seem to be some unexpected tax traps…

I’d bloody-well hope so. Why should the Australian taxpayer fund IP creation to be the property of a US entity?

Clifford Heath.

[Dean Collins]

Be sure to post any feedback you get here to the list (along with your final decision…./experiences) as im sure you aren’t the only one who has this question.

 

 

Cheers,

Dean Collins

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[Matthieu Stone]

Alex,

I’m using the R&D grant and looked at an offshore ownership structure, then decided it was to complex to structure for both taxation and R&D grant eligeability.

Having the IP in US co is problematic. If US co is the owner of the technology, then you may have issues with eligibility.

There are ways of structuring things to be more grant friendly, for example: AU co may own the IP then exclusively license it to the US Co. US investors may not look favourably on this arrangement. You may have to provide some explanation to the ATO for the arrangements don’t include expressions like “because this way we can get the R&D grant”.

In my case the costs of a complex company structure and taxation effects made no sense.

As all circumstances are different, all I can say it is worth getting some professional advice.

I use Claire at from BSI - ctho...@bsi.com.au.

Actually, having just re-read the Customer Information Guide for the first time in a couple of years, things seemed to have changed a bit and it may be a bit easier.

http://www.business.gov.au/grants-and-assistance/innovation-rd/RD-TaxIncentive/Program-Information/Documents/RandDTaxIncentive-ConsolidatedCustomerInformationGuide.pdf

rgds,

- matt.

On 15 Mar 2016, at 3:35 PM, Alex North <al...@alexn.id.au> wrote:

which

[drllau]

there are 3 separate (but interconnected) issues

- IP holding structure

- R&D expensing

- tax treatment of intangibles 

I'll comment on the first two ... most multinationals have a holding structure where ownership of registered IP (patents, copyright, mastheads) etc are in a convenient forum. This is for strong legal enforcement as only owners can enforce legal rights. They then license to operating entities, perhaps on a sale (to holding)/lease-back arrangement with arms-length pricing. R&D comes in the form of grants (non-repayable), tax rebates or subsidies (cash or voucher). So what some companies try to do is make sure that R&D activities are done in high-cost jurisdictions to minimise operating (and thus taxable) income, This factor is reduced in low-tax jurisdictions such as HK or Singapore. In general, industrial policy (note country specific) is to use tax offsets rather than grants as then it avoids leakage to non-domestic firms. This is a response to base erosion / profit shifting so countries like the US has sophisticated (read complicated) transfer pricing rules. This creates headaches for SMEs who lack the resources of MNCs to optimise the international structure but need to navigate the regulatory and accounting systems for intangibles. 

One structure I've personally seen is a UK holding company (optionally Hungarian, Swiss or Begium) with international rights (eg AU operations) and a US specific sister firm. The HoldCo grants licenses to all the international non-US subsidiaries (google commissionaire model). However the UK patent box regime has recently been disputed by Germany and will quite likely be replaced this year, ditto for the Netherlands innovation scheme as general EU tax overhaul. I haven't seen anything specific for Australia, most US firms, especially life sciences, seem to take an M&A approach and just capitalise the expense. This may differ if an operational restructure (PaaS/SaaS) is envisaged so I'd be curious to see who has gone down this route (Atlassan?). 

Lawrence

http://www.linkedin.com/in/drllau

[drllau]

and a link to general description of subpart F US tax treatment. I'm not an accountant so interpret as best as can.

[Patrick Collins]

Alex,

Not only do you want to utilize the R&D tax grant, but the Export Market Development Grant (EMDG) as well. These two items contributed approximately $400k-$800k to 5th Finger’s bottom line for 5 consecutive years. It’s like a free seed round each year, no strings attached. So long as you don’t do anything fraudulent, the money is no strings attached.

Fun fact: 5th Finger’s acquirer was a bit shocked when going through the final due diligence and was wondering “what's the catch” with these grants… nothing like it exists in the US so they were in a bit of disbelief. 

Both programs are designed to spur development of technology within Australia and exporting globally. Having spoken to Joe Hockey recently I can tell you that the government is well aware of the effectiveness of these programs to encourage entrepreneurs to keep their engineering team in Australia and then start building sales and marketing teams globally. Accordingly, these programs are unlikely to get wound back any time soon.

I can second Mattieu’s recommendation for BSI. We used them at 5th Finger for both the EMDG and R&D grant. 

The rules are complicated and always changing and require extensive ‘proof’. I had the EMDG auditors turn up at our San Francisco office unannounced to check that we were legitimately exporting the technology.

At 5th Finger we had an Australian parent and a US subsidiary. If I recall correctly, we had to setup a license agreement for the technology between the parent and sub for the technology usage. To cancel tax implications we had reverse charging of sales and marketing costs. It was a few transactions that the tax auditors and BSI worked on together at the end of each tax year. I can’t remember the details, it was tax geek stuff.

Good luck, and take advantage of these programs, you’re using them exactly for what they’re designed for. 

Patrick Collins
pcol...@gmail.com, 

(415) 578 8929

[Ben Thompson]

I'm a specialist in this field and have a number of clients who operate under similar circumstances.

If you have an company with an AU-registered office and registered for tax here you can claim R&D regardless of where IP is held so lon as you are incurring R&D expenses in australia for R&D activities that are also conducted here.

Many companies such as IBM, Colgate Palmolive hold all IP offshore and in the distant past were not eligible to claim R&D. Since the launch of the R&D Tax Incentive however rules around IP onwership and country of residence have been relaxed as the notion of tax dollars staying in Australia was the focus.

Have the monies declared as a loan/capital. If you register it as income it will detract from the final take-home benefit your R&D claiming company would receive.

If your US parent (and its associates) exceed $20M in aggregated turnover you will only be eligible for the 40% non-refundable tax offset (ie 10c/$ take-home benefit).

[Alex North]

Thank you all, particularly Ben and Patrick.

I think we'll end up with the loan-style arrangement, losing not too much of the benefit to the interest payments.

Patrick - thanks for pointing to the EMDG. I was dimly aware of it already and my understanding is that until we're actually making sales, we're probably too early for it. But next year!