Trademark Valuation and Taxation

Trademark Valuation and Taxation

A trademark is a combination of letters, designs, symbols, shapes, and colors that identify, distinguish, and promote a product or service in the marketplace. Exclusive rights to use the trademark are reserved to the owner, while others are not permitted to use it. Having a trademark is a priceless asset for any business or organization, as the brand name alone enables the customers to identify and relate to the product or service the business offers.

The trademark is the face of the business and thus has high economic value. Businesses are able to gain a great deal of value from trademarks, as they have such huge commercial significance. A trademark owner who wants to transfer his or her rights to a third party can do so just as if they were changing their name for a tangible property. A trademark can thus be assigned, franchised, sold, or pledged to someone else because it is considered an intangible asset.

Valuation of trademarks

To determine whether an asset should be sold or bought, the first step is to determine its value. This is also true for trademarks! Intangible assets are often priced much higher than tangible assets, which makes trademark valuation particularly important. A valuation is usually determined by the seller’s price at which they intend to sell and the buyer’s price at which they are prepared to buy.

It isn’t as simple as it seems when it comes to valuation. There are two reasons why sellers find themselves in an uncomfortable position. Identifying the right value of the trademark at hand and identifying potential buyers who are willing to buy it at the ascertained amount are the first two steps.

In these circumstances, determining what the trademark is worth is of great importance to any business establishment and it is done for three main reasons

  •   If tax-related issues are excluded from transactions
  •   for tax purposes
  •   for accounting purposes.

We will primarily focus on taxation issues with respect to trademark valuation in this article

Valuation Methods for Trademarks

Following are the most widely used methods for determining a trademark’s value.

Methodology for estimating costs

The simplest approach is this. During the process of creating a trademark, the costs of its creation have to be listed.  Marketing and advertising expenses are also included in the cost. The most conventional method for determining the value of a trademark is to calculate its economic value. This method has the major drawback of not capturing the goodwill associated with a trademark.  Nonetheless, this method can be used to value brand new trademarks.

Approach based on the market

A valuation is arrived at by analyzing and comparing trademarks in the market that are similar to the one that is to be evaluated. Here the market data is studied to identify a solution with regards to buying, selling, franchising, etc. An example of a benchmark value would be a brand that sells for 100,000 and that value is used to arrive at a value for the trademark at hand.

Approach to future income

For determining the pecuniary value of a trademark, this is the most preferred and most feasible method. The figure is calculated by performing an in-depth analysis based on the current value of the trademark to determine its future income potential. The value of the trademark is based on its current value, which is discounted to the present date in order to fix its valuation. For instance, say the trademark earns Rs.2 crores a year from sales.

Relief from royalty-based approaches

Its value is derived from the anticipated savings on royalties towards the respective trademark. In order to estimate the value of a trademark, an estimate of the royalties accrued by the trademark or similar trademarks along with all supplementary earnings derived from the trademark can be used.

Trademarks and Taxes

Following is a summary of trademark taxation issues.

Capital gains and business income

The Delhi High Court recently pointed out that, in Income Tax Commissioner v. M/S Mediworld Publications Pvt Ltd, 2011, any income that is derived from the transfer of intangible assets such as Copyrights, Trademarks, etc, will be classified as Capital Gains rather than as ‘income from the business’, and therefore taxable.

It was further inferred that ‘capital asset’ included intellectual property because Section 2 (14) of the Income Tax Act, 1961 mentions it. Also, Section 2(11) of the Income Tax Act, 1961 mentions that Intellectual Property is intangible property and is used to generate profit for the business. In addition, Section 28 of the Income Tax Act, 1961 would also apply to the sale of intangible properties, such as trademarks.

Intellectual Property (IP) and cross-border use

A recent issue concerning IP taxation is the issue of cross-border IP use. The majority of MNCs (Multinational Corporations) allow their subsidiaries outside of their home countries to use and monetize their IP resources. These subsidiaries can sublease those IP rights to other local parties. Assume the IP owner is located in a low-tax region, and those subsidiaries are located in a higher-tax region, and the IP owner can charge excess royalties to them to avoid paying large tax cuts.

This case relates to GlaxoSmithKline (GSK) holdings. Based on the value of their intangible assets, GSK’s US subsidiary income was raised by the Internal Revenue Service (IRS) in the US. Nevertheless, it should be ensured that the royalties collected in controlled transactions are comparable with those in uncontrolled transactions.

The Delhi High Court held in Maruti Suzuki India Ltd. Ltd. Ltd., (2016) 282 CTR (Del) case, the Delhi High Court held that with respect to the transfer pricing of trademarks, carrying promotional activities would remarkably increase the value of the trademark that another entity naturally owns. The question arose as to who would receive the proceeds of the trademark, the foreign registrant or its Indian affiliate. It held that a trademark proprietor must indemnify the affiliated authority if the promotional and marketing expenses exceed the amount that would have been spent normally in the same situation. Therefore, the rate of royalties must be assessed separately.

Additionally, you can review the US Tax Court’s ‘bright line test’ here. According to the test, a licensee would assume economic ownership of the IP assets if the investment put forth by the licensee exceeded the usual expenditure. Even though it was not explicitly stated that this test was used in the GlaxoSmithKline case, there does seem to be an implicit reference to the same, in the judgment.

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