Wednesday, 15 April 2009

Sars - tainting or tainted IP?

Those who review the IP Finance blog may recall a posting entitled SA reducing incentives for intellectual property outflows reporting on the how the introduction of S231 of the South African Income Tax Act seeks to squash so called "intellectual property arbitrage" from 1 January 2009. Pitsi Rammutla (Deloitte) writing for Moneyweb here recently reports further that: 
  • Sars (South African Revenue Services) will not allow a tax deduction relating to the use of "Tainted IP" if the corresponding receipt or accrual does not make up "income" for SA tax purposes
  • where a taxpayer concludes on licence in respect of various items of IP, the royalty payable for the bundle of IP must be apportioned between the relevant items of IP for separate analysis by Sars.
Afro Leo understands that Sars would have an interest in ensuring that tax is paid where it is due and in closing loopholes thought out by bright tax experts. However, there is a balance to be struck between taxing "tainted IP" and tainting IP growth by making it unattractive to develop IP in RSA, either by local business or through a purchase by local business. Is Sars striking that balance? Consider for instance, their tax incentive initiatives too.
 
Tainted IP is defined in the Income Tax Act as:

tainted intellectual property' means intellectual property—

a)        which was the property of the end user or a person that is or was a connected person, as defined in section 31(1A), in relation to the end user;

b)        which is the property of a taxable person;

c)        a material part of which was used by a taxable person in carrying on a business while that property was the property of a taxable person and the end user of that property acquired that business or a material part thereof as a going concern; or

d)        which was discovered, devised, developed, created or produced by the end user of that property, or by a taxable person that is a connected person, as defined in section 31(1A), in relation to the end user, if that end user, together with any taxable person that is a connected person in relation to that end user, holds at least 20 per cent of the participation rights, as defined in section 9D, in a person by or to whom an amount is received or accrues—

i)          by virtue of the grant of use, right of use or permission to use that property; or

ii)         where that receipt, accrual or amount is determined directly or indirectly with reference to expenditure incurred for the use, right of use or permission to use that property;
 

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