Judy Chebet, a tax and IP lawyer in John Syekei's highly effective IP team at the firm, summarises the impact on IP as follows:
1. CGT will apply to the profit/gain to companies when they transfer their IP assets because of the wide definition of ‘property’.
2. Under the new law, the gain is a net of acquisition cost and sale price of the asset, which in our view is for the most part not a workable model for IP because outside an acquisition transaction, there is no ‘purchase’ cost of IP. If the IP being transferred has been valued for purposes of the transaction, this cost is likely to be a market value (arms length) as opposed to a historical cost.
3. It is not clear how the tax man will value IP for purposes of imposing CGT, and neither is it clear how or when the CGT would be collected by the tax authorities for IP transactions such as assignments, and even less clear where the IP is unregistered and therefore doesn’t need to be registered at KIPI.
4. There is no guidance on the applicability of CGT in circumstances where there is no ‘sale’ as such, as in franchises, licences, dealerships and distributorships.
5. Notably, the CGT framework is a 1970s legislation that was suspended in 1985 and is now being re-operationalised. We therefore expect that it will be quite some time before the necessary tax machinery is in place to deal with the valuation and assessment processes for CGT on IP, and we will closely monitor this. You may recall that in September last year, we passed the VAT Act 2013 which made IP transactions subject to VAT, and this is yet to be implemented.
6. With this re-introduction of CGT, we advise that transactions involving transfer of IP as well as where IP rights are granted for a period (as in licenses for example) should be structured to give adequate time for the consultations with the tax authorities.
The law that has brought back CGT was signed into law only on Tuesday this week, and we are yet to see the final legislation, so we will update you in the event there are changes. We are also keeping a close eye at the tax authorities interpretation and implementation of the VAT Act for IP assets, and we will do the same for the Income Tax Act as amended by the Finance Act 2014.
Thanks Judy. It seems that you may have a busy Christmas closing deals before the Act becomes effective!