Intangible assets like patents and copyrights require an intangible tax, which is a form of sales tax. These assets are difficult to value, making it challenging to enforce the tax. Some companies avoid the tax by selling the rights to foreign subsidiaries.
Some assets are intangible, meaning they lack physical characteristics; however, such items have yet to be taxed by some governments. Examples of assets that require this type of tax include copyrights, patents, and trade secrets, just to name a few. By nature, an intangible tax is a form of sales tax in that it is usually levied when a legal or competitive asset is sold. The tax rate is often determined by adding a percentage of the item’s value, usually between one and ten percent, to its retail cost, but this rule can vary from one government to another.
Legal assets
An intangible tax is often levied on legal property, also known as “intellectual property”. This typically includes copyrights, client lists, patents, trade secrets, and trademarks. These are classified as intangible because their true value is not known at the time of purchase or sale and they are usually non-physical items. For example, a patent can lead to a long sales life, or it can be replaced by a superior patent a week later; likewise, it’s difficult to know how much income will be generated from advertising to a customer list. The owner of these items typically has to pay intangible taxes to the government because the true value of the property is unknown.
Competitive assets
Some activities that take place within a company, such as knowledge, collaboration and leverage activities, are considered competitive assets. While no person or business can fully own this type of asset, as it typically involves multiple people, it is still considered a taxable item because it plays a major role in the overall value of the business. Many organizations do not pay intangible taxes on legal or competitive assets, as they are not sure how to calculate their value, but doing so could have greater repercussions in the end, depending on government laws.
problematic
Intangible tax systems are notoriously difficult to enforce. As with property taxes, they are based on an estimated value of an asset. Value can be a matter of opinion and can differ between the valuer and the valued. Also, the value of intangible assets, such as inventories, fluctuates. Due to their difficult-to-quantify nature, some individuals underestimate their resources or forego the process altogether. Many local government offices are unable to verify immaterial tax self-assessments.
Some believe that the US government loses tax revenue when intangible assets, such as intellectual property rights, are sold to foreign subsidiaries. This occurs when a US company sells its rights to a section of the company based in a country where it will not be taxed. US law provides that property is subject to an immaterial tax; however, companies often sell the rights below market value to save money by avoiding the tax.
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