Valuing your Intellectual Property

For growing numbers of companies worldwide, the true value of the company lies in its intellectual property (IP), not in its physical assets.

For example, among listed companies on the New York and London stock exchanges, it is estimated that whereas in 1970 approximately 80% of value lay in the tangible assets of such companies, today it is closer to 30%, with 70% of value lying in intangibles.

A wide range of commercial transactions involving IP result in a capital gain or loss, and in the absence of a valuation the Income Tax Act determines how value is to be allocated to IP in such transactions, and not necessarily to a proprietor´s advantage. It is therefore imperative that IP is valued within the window period granted by the South African Revenue Services (SARS), i.e. before the end of September 2003.

The capital gain which results from a sale of IP is calculated by deducting the "base cost" of the IP from the sale proceeds. The base cost of the IP is the "value" of the asset as at 1 October 2001, which can be calculated as a market value of the IP at that date, 20% of the proceeds of the disposal of the IP; or the time apportioned base cost of the IP.

To rely on the market value, the IP must be valued by the end of September 2003 and the valuation report must be lodged together with the proprietor´s first tax return after September 2003. Despite lodging the valuation report, a proprietor will not be prevented from choosing the time apportionment method of calculating the trade mark value if this is more favourable. However, in the absence of a market valuation, the time apportionment method will apply.

Apart from minimising exposure to Capital Gains Tax (CGT), the valuation of IP benefits proprietors in the raising of finance; the reflecting of IP on the balance sheet; in mergers, acquisitions and disposals; and in licensing transactions and brand management, including resource allocation, brand strategy development and performance tracking. In addition, new sources of revenue are often identified among non-core IP assets, which can be sold or licensed in terms of structured licensing programmes. It is in this way that IBM has managed to increase its licensing revenue from an extremely low base to over $1 billion per year.


Date published: 2003/09/01
Author: Spoor & Fisher

Tags: intellectual property. value income tax