Limiting Base Erosion

S. 5041. Introduction

Transactions including intangibles have recently received significant attention from tax professionals, tax authorities and international organizations. There also have been a number of high profile court cases dealing with the transfers or use of intangible assets. Some of these court cases involved tax disputes amounting to millions of dollars. Why are transactions involving the use or transfer of intangible assets so important nowadays? The increased interest in them is primarily driven by the fact that intellectual property is starting to be the main capital resource for generating profits for companies. Historically, companies generated profits mainly by the extensive holding of natural resources and manufacturing facilities. Nowadays, however, profit-generating power has shifted to intellectual property.

As a result, intangible assets generate immense income that countries would like to tax. The creation of intangible assets usually requires significant expenses. These expenses are expenses that are generally treated as deductible expenses either directly or over certain period of time. In addition, payments for the use of intangible assets are usually considere...