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| Chebet |
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!
