comes less critical. To gain financial
flexibility, a company might identify
and isolate its IP. The rights to identified IP, as trademarks and technology,
can be moved to a distinct subcorporation. Separating IP is an initial phase
in setting up an offshored operation
when significant IP is involved. 29 To be
productive, the extant technology still
must be made available to the creative
workers, by having the productive corporate divisions pay license fees to the
subcorporation holding the technology IP; see the sidebar “Property Rights”
for an illustrative example clarifying
the process of splitting rights from the
property itself.
Such transfer-of-rights transactions
are even simpler when applied to IP.
The rights to a company’s IP or to an
arbitrary fraction of that IP can be sold
to a controlled foreign holding company (CFH) set up in a taxhaven. Once
the rights to the IP are in the CFH the
flow of income and expenses changes.
The rights to the IP are bundled, so
no specific patents, trade secrets, or
documents are identified. The net income attributable to the fraction of
the IP held in the CFH is collected in
an account also held in the taxhaven.
One way of collecting such income is
to charge royalties or license fees for
the use of the IP at the sites where the
workers create saleable products, both
at home and offshore. There is no risk
of IP loss at the CFH, because nothing is actually kept there. To reduce
the risk of IP loss where the work is
performed, new offshore sites are set
up as controlled foreign corporations
(CFCs), rather than using contractors. 29 Since IP is crucial to making
non-routine profits, the royalty license
fees to be paid to the CFH can be substantial and greatly reduce the profitability at the parent and at the CFCs
from worldwide software product
sales (see Figure 2).
The consolidated enterprise thus
gains much strategic business flex-
ibility. Work can be shifted wherever it
appears to be effective, perhaps where
new incentives are provided, and
the needed IP can be made available
there, as long as the license fees are
paid to the CFH. 22 Paying these fees as
royalties on profits is preferred, since
profits reflect the ever-changing profit
margins due to sales variability and to
switching to cheaper labor.
Valuing transferred iP
The CFH subcorporation that obtains
the rights to the IP, and that will profit
figure 1. components of the economic loops for software.
taxes
routine profits
Common Knowledge
Commodity Products
Public and Private
investments
Know-how
of the
work force
integration
intellectual
Capital
intellectual
Property
technology
high-value
Products
trademarks
taxes
non-routine
profits
figure 2. extracting and selling the rights to derive income from a property.
Parent corporation
offshore job sites
salaries
$
Know-how
ofthe
workforce
integration
initial
purchase
$$
license
Fees
$
high-value
Products
sub corporation
“CFh”
iP documentation
purchased
rights to
intellectual
property
rights to the
intellectual
non-routine
profits
january 2011 | vol. 54 | no. 1 | communications of the acm 69