The U.S. International Taxation of the Transfer of Technology by American Enterprises: A Primer for the CFO, Tax Director, and Foreign Tax Advisor
| Author | David S. Kerzner |
| Pages | 423-455 |
423
Chapter 17
The U.S. International Taxation of the
Transfer of Technology by American
Enterprises: A Primer for the CFO, Tax
Director, and Foreign Tax Advisor
david s. kerzner*
A. INTRODUCTION
During the years I lived in New York City, I was fortunate to attend many
symposiums, colloquiums, and lectures on international business law given
by Professor Jerome Cohen, of New York University School of Law. Jerry, a
former Associate Dean of the Har vard Law School and Senior Counsel to
the law firm of Paul Weiss, always would begin each lecture with the same
admonition: “The first question in any international business tra nsaction
is what are the tax consequences?” I have found, after many years of prac-
tice in international t ax law, the importance of knowi ng the answer to t hat
question lies in providing senior management with a map revealing both
tax savings, and more importantly, costly “tax m ines” that can easily and
needlessly bur y hard-ear ned corporate profits, forever. As Mr. Spock once
remarked, “a lack of facts always invites danger.” Indeed, the pur pose of
* The author acknowled ges with appreciation the contr ibution to this chapter of Sunit a
Doobay, LL.B. (Quee n’s), LL.M.( Taxat ion) (NYU), Member of the New York and Ontar io
Bars. Please note that use of ce rtain words, such as “should” and “ will,” throughout this
chapter is for the pur pose of facilitating read ability and is not intended to represent a n opin-
ion or confer a specific leve l of assurance with respect t o any of the conclusions reached.
This chapter do es not constitute legal advice and may not b e relied upon by anyone in con-
nection with U.S . or foreign tax law. Furthermore, i n compliance with U.S. tax sta ndards
of tax practice pre scribed by the U.S. Treasury t hat apply to all U.S. tax adviser s, please be
advised that any U.S. t ax advice in this docu ment is not intended or written to be u sed, and
cannot be used, by a c lient or any other person or entity for t he purpose of avoiding U.S. ta x
penalties th at may be imposed on any taxpayer.
424 david s. kerzner
international tax planning is not about deter mining business objectives as
much as it is about providing executive management with the tools and in-
formation to make more informed, and, hopefully, more logical decisions.
And so it is on that note that I invite you (the corporate executive, tax
director, and foreign tax advisor) to become informed about the primary
U.S. tax considerations which generally apply to the outbound tra nsfer of
technology from a U.S. company to a foreign jurisdic tion. The a im of th is
chapter is to create awareness of the many key issues often considered in
an inter national tec hnology transfer made by a U.S. business, and of the
value in placing proper resources around these issues. The chapter is based
on my years of providing lead technical advice and project management for
global restruc turings of public companies while working in the Washing-
ton national tax office, and the New York City and Los Angeles offices of a
Big Four public accounting firm. We wi ll div ide the subject material into
three primary tax areas: fi rst, the U.S. taxation of the transfer of the tech-
nology abroad; second, the U.S. tax ation of t he foreign exploitation of that
technology, post transfer; and third, the foreign t axation of the exploitation
of that technology, post transfer.
Equally important in describing the purpose of this chapter, is mention-
ing, up front, what it is not about. This is not a technical review of the num-
erous and sophisticated tax rules contained in the Internal Revenue Code
and its Regulations that may apply to the outbound transfer of tech nology.1
Those rules, and their surrounding cases and administrative rulings, could
well encompass a separate book on their own, and are outside t he scope of
this chapter. For our purposes, the value to be derived from this chapter
lies in learning about the road that lies a head, and the likely chal lenges
and opportunities t hat you, the CFO, tax director, and foreign tax advisor
may face. Above all, the key to achieving global strategic optimization from
a company’s technology can be summarized in nine words: the planning
process, the planning process, the planning process.
B. STRUCTURAL CONSIDERATIONS
1) Business Optimization Planning
When it comes to structural changes in the way a company conducts its
business, in particu lar in connection with expansion into foreign markets,
the best tax advice from the most brilliant legal minds is meaningless with-
1 Unless ot herwise indicated, a ll section references are to the Int ernal Revenue Co de of 1986,
26 U.S.C., as amended [Code] a nd all references to regulations are t o the Treasury Regula -
tions, 26 C.F.R., issued t hereunder [Reg.].
The U.S. Inter national Taxation of the Trans fer of Technology by Amer ican Enterprises 425
out proper planning and execution. There is a huge gap between having an
efficient strategy on the one hand, and realizing its benefits on the other.
The bridge between fantasy (the plan) and reality (your business oper-
ations) is built with a combination of factors: excellent project management
leadership; strong technical advice; a well-thought-out business optimiza-
tion plan; “buy-in” at the company senior management and functional line
management levels in connection with t he proposed strategy; and, careful
execut ion.
While we are on the topic of dispelling notions, it is important for man-
agement to understand that international tax planning for technology com-
panies is not a “one-size-fits-all” undertaking; there a re no “cookie-cutter”
approaches in this endeavour. It all b egins by educating your t ax advisors,
who will attempt to guide and plan with you, about your company’s key suc-
cess factors, value drivers, and business goals. If your tax advisors do not
understand these concepts from the beginning, what else is there for them
to understand? Armchair academics is a poor basis for global business opti-
mization, whatever the size of your company.
Business optimization plan ning can be divided into three major areas:
feasibility, design, and implementation.
a) Feasibility
In the feasibility stage, the objective is to identify m ajor work streams, key
tasks, and key milestones that wil l encompass the project. Data is gathered
at a high level, looking at each work st ream to determine if t here are any
technical ta x or non-tax commercial showstoppers. Depending on t he pro-
ject, it may be necessary to conduct pre-feasibility prior to feasibility stud-
ies. Once a project is deemed viable, one can proceed to the nex t stage of
planning — the design phase.
b) Design
At this stage, we move to a much greater level of detail. The emphasis is
working with management to establish a model for the production, market-
ing, and deliver y of the technology to the foreign ma rkets in an efficient
manner. Much of the information gleaned for this process is ta ken from
interviews with senior and functional li ne ma nagers. During the design
stage the tax advisors are most frequently working together with econo-
mists who are expert in transfer pricing issues. More complex projects can
also involve financial modelers who will, working with the tax advisors,
economists, and treasury personnel of the company, build a suitable model
to test various design simulations. Once senior management has signed off
on the design phase, work begins on implementation.
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