Characterization of computer software revenue in international transactions

Article Abstract:

The income characterization of software companies' revenues as royalties or sales is an ongoing industry-wide tax question. The best approach would be to distinguish royalty income generated by software copyright transactions as separate from income generated by software product transactions or sales. Thus, the issue turns on the application of proper terminology and proper interpretation of copyright law. The proposed US characterization rules, the OECD rules, bilateral approaches, applicable foreign laws, and such US-specific considerations as the foreign tax credit, transfer pricing, cost sharing, and controlled foreign corporation income are also discussed.

Computer software industry, Software industry, International aspects, Income tax, Royalties, Royalties (Intellectual property), international

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Internal use software and the research credit

Article Abstract:

The IRS has released proposed regulations under IRC section 41 that employ a facts and circumstances test to determine whether expenses in the development of internal use software qualify for the research tax credit. Internal use software must be developed for use in an activity or as a part of a production process that also qualifies for the tax credit. Recent case law suggests that the IRS and the courts may take a hard line on whether internal use software is innovative in nature, involves significant economic risk and is not commercially available.

Public Finance Activities, Corporate Tax Reduction, Industrial research, Corporate taxes, Research and development tax credit

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Planning opportunities remain under proposed regulations classifying transfers of computer programs

Article Abstract:

The IRS has promulgated proposed regulations under IRC section 861 that identify how copyright law should be integrated into tax laws governing foreign transfers of computer software. The regulations include examples that classify software transactions as sales, leases or licenses of copyrights or copyright articles. Software developers should be made aware of the significant tax impact that can result from how the software is transferred to the consumer or reseller.

Copyright licenses, Copyright licensing

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