implications of international transfers of energy-related ...–which entity is the ip owner (the...

Implications of International Transfers of Energy-Related Technology and IP Assets

Kathrin ZoellerWEATHERFORD

Ryan ChadwickTMK IPSCO

Joseph BeauchampJONES DAY

March 28, 2017

I. Topic 1: Implications of

International Transfers of Energy-

Related Technology and IP Assets:

Export Controls

II. Topic 2: Tax Issues Associated

With Cross-Border Transactions

Topic 1: Implications of International Transfers of Energy-Related Technology and IP Assets: Export Controls

Ryan ChadwickTMK IPSCOMarch 28, 2017

Topics:

• Export Control Background• Principal Export Control Agencies

• Key Concepts

• Deemed Exports and Release of Technology

• Export Authorizations & Extraterritorial Application

• Penalties

• International Transaction Implications• Successor Liability

• Due Diligence Considerations

• Foreign Ownership Considerations/CFIUS

• IP Specific Export Provisions• USPTO Export Authorities

• EAR Exemptions for Patent Activities

4

Export Control Background

5

6

U.S. International Trade Control Regime

Regulations Agency Authority/Law

ITAR

Department of State

Directorate of Defense

Trade Controls (“DDTC”)

• Arms Export Control Act of 1976 (AECA)

EAR

Department of Commerce

Bureau of Industry and

Security (“BIS”)

• Export Administration Act of 1979 (“EAA”)*

• International Emergency Economic Powers Act (“IEEPA”)

• Trading with the Enemy Act (“TWEA”)

• Executive Orders

OFAC

Regulations

Department of the

Treasury

Office of Foreign Assets

Control (“OFAC”)

• IEEPA

• TWEA

• Specific sanctions legislation enacted by Congress (e.g., Iranian

sanctions and Helms-Burton Act (Cuba))


Other

Regulations

Department of Energy

Department of Commerce

Department of Defense

NRC

USPTO

(and others)

• National Industrial Security Program (NISPOM)

• Atomic Energy Act


• 10 CFR Part 810

• 37 CFR Part 5

*The EAA has lapsed, but the EAR remain in effect through IEEPA.

Principal Export Control Agencies

• Directorate of Defense Trade Controls (State)• International Traffic in Arms Regulations

• Regulates:

– Defense Articles listed on the U.S. Munitions List (including

Technical Data and Software)

– Defense Services (furnishing assistance to foreign persons)

• Bureau of Industry and Security (Commerce)• Export Administration Regulations

• Regulates:

– Purely Commercial Items (Goods, Technology, Software)

– Dual-Use Items (Items with commercial or military use)

– Generally not services/activities, with some exceptions

• Office of Foreign Assets Control (“OFAC”)(Treasury)• Economic sanctions

7

Key Concepts

• Export• Actual shipment or transmission of goods or technical data from the

United States

• Transfer of ownership, registration or control of certain aircraft, vessels,

satellites, or spacecraft

• Reexport• Same, but from a foreign country to a third country

• Subject to the EAR• Any goods, technology or software not subject to exclusive jurisdiction of

another agency (e.g., DDTC, USPTO)

• U.S.-origin goods or other goods in the United States

• Certain foreign-made goods containing more than de minimis amounts of

U.S.-origin parts or technology

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Key Concepts

• Deemed Export• “Releasing” or otherwise transferring . . .

• . . . technical data (ITAR), or technology or software source code (EAR)

• . . . to a foreign person

• Deemed export considered to be an export to the recipient’s citizenship or

nationality

– EAR: most recent citizenship or nationality

– ITAR: considers all previous citizenships or nationalities

• Release• Visual or other inspection by a foreign person that reveals technical data,

technology, or source code

• Oral or written exchanges of technical data

• EAR Only: Includes the act of a foreign person causing a release to

him/herself through the use of passwords (etc.) to access the controlled

technology or software.

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Required Authorizations

• ITAR• If exporting a Defense Article or Defense Service to any destination, a

license or other authorization (e.g., Technical Assistance Agreement) is

required

• EAR• License requirements depend on sensitivity of the technology and the

foreign policy/national security concerns related to the destination

– Commerce Control List identifies sensitive goods, etc.

– Commerce Country Chart: matrix identifying most controls

– Additional controls may apply (e.g., encryption, short supply)

• Prohibited End-Users and-Uses

• Extraterritorial Application• Export restrictions follow the item/technology

• Foreign persons often surprised that U.S. laws apply to them

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Countries Subject to U.S. Sanctions

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Comprehensive: U.S. Persons

(and, in certain cases, U.S.

foreign subsidiaries) prohibited

from engaging in virtually all

transactions.Moderate: Varied restrictions on

imports, exports, financial

services.

Targeted: Targeted sanctions on certain

individuals and entities.

Cuba

Sudan*

Lebanon

Balkans

Zimbabwe

Burundi

Libya

Central African Republic

South Sudan

Russia

DR Congo

Iran

Belarus

*Sudan sanctions temporarily suspended; extensive export restrictions continue to apply.

Venezuela

Somalia

Yemen

Iraq

North Korea

Ukraine

Syria

Crimea

Penalties

• ITAR (Arms Export Control Act)• Criminal (willful) violations $1 million and/or 10 years imprisonment per

violation

• Civil violations up to $1,094,010 per violation

• Administrative actions include: ITAR Debarment, Government Contract

Debarment

• EAR and OFAC Sanctions (International Economic Emergency

Powers Act)• Criminal (willful) violations $1 million and/or 20 years imprisonment per

violation

• Civil violations up to $289,238 per violation or 2x the value of the

underlying transaction, whichever is greater

• Administrative actions include: Denial of export privileges, placed on the

Entity List

12

International Transaction

Implications

13

International Transaction Implications

• Successor Liability• Strict liability for violations; 5 year statute of limitations

• Asset purchase agreements will not shield from enforcement

• Recommend including an express “compliance with export control and

economic sanctions laws” representation

• Due Diligence• Extent and scope of international trade, sensitivity of technology

• Evaluate programs, policies, procedures, and operations

• Deemed exports and data room access

• Deemed exports and site visits

• Foreign Ownership Considerations

14

Deemed Exports andTechnology Control Plans

• “But my company doesn’t ship goods overseas.”• Cloud computing, offshore software development

• Foreign national employees in a U.S. facility with controlled technology,

but U.S. Permanent Resident = “U.S. Person”

• A TCP is More than an IT Policy• Good news: Most companies already have procedures to protect IP and

other trade secrets.

• Segregation of non-U.S. employees, visitors vendors from controlled tech:

Physical security and network permissions

• Cloud computing server locations?

• Under the EAR, end-to-end encryption = not an “export”

• In the International Transaction• Buyer’s diligence focuses on TCP compliance

• Sellers must treat Buyer teams under the TCP; NDA does not suffice

15

Foreign Ownership Considerations

• Committee on Foreign Investment in the United States• Reviews potential threats to national security and critical infrastructure.

Energy is critical infrastructure.

– No minimum threshold for control; theoretically could obtain control

with 0% ownership. Purely passive investments <10% exempt.

• Voluntary process, but CFIUS also may direct submission

• President has the power to block or unwind transactions

• Timeline

– Prefile period and 30 day transaction review: plan 45-60 days

– Additional 45-day investigation plus 15-day presidential determination,

if necessary

• Other Foreign Ownership Notifications to Government• ITAR Registration: 60-day advance notice to DDTC

• Defense Security Service: Facility Security Clearance(s)?

• Other potential energy industry filings:

NRC/DOE (nuclear), CFATS (chemical facilities)

16

IP Specific Export Provisions

17

USPTO Export Authorities (37 CFR Part 5)

• FFL Required to File Foreign Applications• Application for FFL included with U.S. patent applications

• FFL also authorizes export of technical data abroad exclusively for

purposes relating to preparation of filing/prosecuting a foreign application

– Separate authorization under EAR, ITAR, or DOE Part 810 not req’d.

– Automatically covers the subject matter in the disclosure, may petition

USPTO to disclose additional information.

• Any other reason or including any other information requires authorization

from the other export enforcement agencies.

Tip: Part 5 authorization is narrow and filing receipt makes clear that the licensee remains liable for compliance with other laws related to espionage and national security, etc. Consider obtaining commodity classification and authorization through the cognizant export agency to avoid missteps.

• If an Invention Secrecy Order issues, must seek permit or

modification of order to authorize export.

18

EAR Exemptions for Patent Activities(15 CFR § 734.10)

• Technology is Not Subject to the EAR (i.e., no authorization

required) if it is contained in: • A patent or open (published) patent application

• A published patent or patent application prepared wholly from foreign-

origin technology, where the application is being sent to the foreign

inventor to be executed and returned to USPTO

• As authorized under the FFL regulations at 37 CFR Part 5

• A patent application sent to obtain a signature from a foreign inventor who

was in the United States when invention made (or is co-inventor with a

person residing in the U.S.)

• ITAR only exempts as provided in 37 CFR Part 5

• Restrictions on activities of U.S. persons still apply

• Economic sanctions (OFAC), WMD proliferation (EAR)

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Ryan Chadwick: rchadwick @tmk-ipsco.com

Chad Dorr: [email protected]

Michael Gurdak: [email protected]

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Points of Contact:

Topic 2: Tax Issues Associated With Cross-Border Transactions

Kathrin ZoellerWeatherfordMarch 28, 2017

Legal and Tax Considerations in IP Transfers

What are the assets?

• Technology (increasingly) critical to compete

• Industry invests in technology even in downturn

• Products, service equipment, processes, manufacturing

know how

• RD&E

• Patents, trade secrets, know how

• Trademarks/marketing intangibles including customer lists,

etc.

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Who owns the Assets?

• Legal registration provides for legal protection with respect to external

controversies, but does not in all cases clarify which legal entities are

the beneficial owners within large multi-national companies. The

internal right to exploit, license, make, use, etc. may be distributed

differently from the legal rights.

• Entities that have invested in RD&E have economic rights within the

multinational company and need to ensure that they record adequate

taxable income as a consequence of

• Commercializing the IP in their business

• Licensing the IP to affiliated entities or 3rd parties

• Sale of the IP to affiliated entities or 3rd parties

23


IC Agreements

• May or may be in place clarify which legal entities have the economic

rights

• This may need to be determined through a review of the facts of several

years

• It is recommendable to have IC Agreements that clarify:

• Contract RD&E Agreement

– which entity is the IP owner (the one the pays and has the risk)

– whether the risk has been with the same entity throughout

– Compensation: clarify whether total cost or budget cost, mark up or

rates

• Patent Assignment

• Patent Maintenance and service for another entity

• License Agreement

• IP sale agreement

• Cost Sharing agreement24


Cost Sharing

• 482-7: Cost sharing participants (usually affiliates in different territories)

share the cost of developing intangibles (Technology and Marketing)

• Usually an initial buy in also referred to as Platform Contribution (IP

transfer)

• After that ongoing sharing of RD and other intangible development cost

according to anticipated benefits

• The participants are economic owners but may not be IP legal rights

holders

25


Buy In Valuation

• Potential for material audit controversy; several methods discussed in

regulations; objective is to capture the value of the technology or other

intangibles that generate income in cost sharing arrangement; IRS often

views the platform as more long lived or more valuable than taxpayers

do

• IRS may make adjustments for PCT throughout life of CSA if future

actual return on the investment exceeds the buy in payment; some large

controversies have occurred that make some tax payers carefully weigh

license versus cost sharing

• Tax and IP legal should stay in contact to discuss comparables used in

controversy that may be useful for comparables for valuation or transfer

pricing studies

26


CSA and License Agreements Drafting Suggestions

• Consider difference between license and cost sharing

• License: Licensor remains economic owner, licensee merely has

rights stated in agreement; generally license payment is contingent on

business volume (per cent of revenue or per unit); license s.t.

withholding tax between many countries; tax treaty may or may not be

available

• Cost sharing: generally buy in is sale or is structured as stream of

defined payments; ongoing sharing of cost is proportional to

anticipated benefits but not contingent, i.e. the participants are taking

the risk of the investment as economic owners

• If not structured as cost sharing, can be deemed cost sharing

27


Drafting Suggestions, continued

• Work with tax to avoid partnership characterization

• Adjustment clause to address changes in arm’s length royalty rate,

whether resulting from taxpayer’s analysis and transfer pricing

documentation, or examination by U.S. or foreign tax administrators

• For both PCT’s and Licenses, one can avoid sale treatment by

making sure that the transfer is not of “all substantial rights”

• Include provision providing for the reimbursement of amounts

attributable to Share based compensation (SBC) in case the Altera

decision is upheld

28


BEPS

• OECD issued several reports on combatting what’s perceived as tax

base erosion

• The report on transfer pricing focused on key concerns, including:

• Transactions involving intangibles, because misallocation of profits

generated by IP is viewed as a key driver profit shifting (Action 8)

• Contractual allocation of risks and the allocation of profit to that risk,

versus the underlying activities actually undertaken (Action 9)

• Returns to funding and the level of activity undertaken by the funding

company (Action 9)

• Recharacterization of transactions that are not commercially rational

(Action 10)

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BEPS continued

• The guidance states that legal ownership alone does not generate a

right to all (or any) of the return that is generated by the exploitation of

the intangible.

• An entity performing important functions, controlling economically

significant risks and contributing assets will be entitled to an appropriate

return reflecting the value of that contribution.

• It will no longer be possible to use special contractual arrangements,

such as a cost contribution arrangement, to inappropriately allocate

profits.

30


BEPS continued

• Capital-rich entities without any other relevant economic

activities (“cash boxes”) will not be entitled to any premium

return. Instead, cash boxes will be entitled to only a risk-free

return on capital provided.

• To avoid the cash box characterization and earn the return

appropriate to a risky investment, a capital-rich entity must

establish that it has the personnel and ability to evaluate,

manage, and accept the risk.

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