OECD Defines Trade Secrets Broadly as Intangible Assets

Secrets — The language of business is accounting, and OECD BEPS defines trade secrets using accountancy language in the OECD’s recently released Base Erosion Profit Shifting Guidelines.

IP professionals should note that the financial community’s use of the term “intangible assets” is broader than “intellectual property,” although most of these intangible assets must be managed with the same professionalism as traditional IP assets like patents. In short, IP professionals have an opportunity to help their clients in areas where they might not have been historically active.

This article is part of our continuing series on the OECD and its BEPS Rules, which we believe will fundamentally change how corporations manage their trade secrets. Here are the other articles in our OECD BEPS series.

The story of any company, no matter the size, the industry, or location, is told through its financial records and reports. Income, debt, revenue versus expenses, compensation, and cost of retaining customers can all be found on financial statements. If the financial community have embraced the definition of intangibles as described here, then it is imperative that the IP community do so too.

We’ll briefly discuss the OECD guidelines before exploring the OECD’s definitions for intangible assets.

The OECD BEPS Guidelines

Multinational companies have long employed complicated tax structures to help them lower their overall tax rate. Many of these tax structures are entwined with the innovative assignment of intangible assets and intellectual property.

The OECD has recently issued guidelines to help governments crack down on multinational companies abusing tax loopholes or funneling money through tax havens.

A comprehensive package of measures has been agreed upon via the OECD. Countries are committed to this comprehensive package and to its consistent implementation. These measures range from new minimum standards to revision of existing standards, common approaches which will facilitate the convergence of national practices and guidance drawing on best practices.

Described by the OECD as “the most significant re-write of international tax rules in a century,” the new rules include 15 recommendations to stop profits being moved from high-tax to low- tax jurisdictions and to force firms to be transparent about where they generate income.
The G20 is already working to implement the new guidelines.

The new guidelines may be of great interest to finance and tax experts. However, the new rules also have serious implications for the way in which the IP community track and report intangible assets.

The Definition of Intangible Assets

The OECD BEPS guidelines include a comprehensive definition of “intangible assets” and describes a number of sub-categories. Here are the OECD’s definitions for some key intellectual property assets:

Patents: A patent is a legal instrument that grants an exclusive right to its owner to use a given invention for a limited period of time within a specific geography. A patent may relate to a physical object or to a process.

Know-how and trade secrets: Know-how and trade secrets are proprietary information or knowledge that assist or improve a commercial activity, but that are not registered for protection in the manner of a patent or trademark. Know-how and trade secrets generally consist of undisclosed information of an industrial, commercial or scientific nature arising from previous experience, which has practical application in the operation of an enterprise. Know-how and trade secrets may relate to manufacturing, marketing, research and development, or any other commercial activity.

Trademarks: A trademark is a unique name, symbol, logo or picture that the owner may use to distinguish its products and services from those of other entities. Proprietary rights in trademarks are often confirmed through a registration system.

Government licenses & concessions: Government licences and concessions may be important to a particular business and can cover a wide range of business relationships. They may include, among others, a government grant of rights to exploit specific natural resources or public goods (e.g. a licence of bandwidth spectrum), or to carry on a specific business activity.

Rights under contracts: Rights under contracts may also be important to a particular business and can cover a wide range of business relationships. They may include, among others, contracts with suppliers and key customers, and agreements to make available the services of one or more employees.

Goodwill: Depending on the context, the term goodwill can be used to refer to a number of different concepts. In some accounting and business valuation contexts, goodwill reflects the difference between the aggregate value of an operating business and the sum of the values of all separately identifiable tangible and intangible assets. Alternatively, goodwill is sometimes described as a representation of the future economic benefits associated with business assets that are not individually identified and separately recognised. In still other contexts goodwill is referred to as the expectation of future trade from existing customers. The term ongoing concern value is sometimes referred to as the value of the assembled assets of an operating business over and above the sum of the separate values of the individual assets.

Interestingly, the OECD definition refers to intangibles rather than the narrower category of intellectual property. Given the OECD’s role and influence over national tax authorities, then this definition will clearly migrate down to national level and the tax authorities, finance and tax advisory firms as well as the in-house finance and tax departments within operating companies.

Achieving a common understanding is not always as easy as it might first appear. Talking the same language is an important first step in any project. When we all use the same language, we have a common understanding of precisely what we mean and what is expected.

What is the OECD?

The OECD defines itself as a forum of countries committed to democracy and the market economy, providing a forum for comparing policy experiences, seek answers to common problems, identify good practices, and co-ordinate domestic and international policies.

The OECD works with governments to understand what drives economic, social and environmental change. The organization measures productivity and global flows of trade and investment. They analyze and compare data to predict future trends. They also set international standards on a wide range of things, from agriculture and tax to the safety of chemicals.

The OECD stands at the forefront of efforts to improve international tax co-operation between governments in order to counter international tax avoidance and evasion.  Establishing international tax standards has become a major focus of the OECD in recent years as governments around the world struggle to restore confidence in markets and the institutions that make them function. A critical element in the return of confidence relates to re-establishing healthy public finances as a basis for future sustainable economic growth, according to OECD literature.

Hazel Helps Companies Identify Rank & Protect Their Trade Secrets

The Hazel Trade Secret Asset Management System may help your law firm manage your clients’ trade secrets and trade secret processes. Hazel can keep track of corporate trade secrets and help you determine an appropriate level of protection for each trade secret recorded. Hazel can record who in an organization is responsible for a given trade secret, who is responsible for protecting the trade secret, and who has access to the trade secret, among other things. Hazel can also help with tax issues by noting where a trade secret asset is legally held and what agreements pertain to it. Contact the Hazel Team today to learn more.

For Secrets, I’m Donal O’Connell.

Credits:

Cover: by BlincParth – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=49727496

Measuring by Edd Prince from Madisonville, United States – How Tall Am I?, CC BY 2.0, Link