It's widely believed that value of Coca-Cola's trademark, although intangible, exceeds the capital value of all of Coca-Cola's products and assets.
That's why Coca-Cola has done everything it can to protect the intellectual property behind its recipe.
And it's not the only company that's doing this.
'While Intellectual Property (IP), eg patents and trademarks, has always been valued, increasing recognition for this aspect has become well established, especially for asset registers in company balance sheets,' explains the SABS.
In fact, says SABS, 'realisation has gained ground amongst accountants and corporate executives that IP can form a significant proportion of the assets in some businesses.'
That's why if your company works with intellectual property you need to consider whether you're calculating royalties correctly or not…
Use the Relief from Royalty Methodology to pay royalties on intellectual property
'In South Africa, nearly all intellectual property valuations performed for tax purposes apply the Discounted Cash Flow (DCF) model in combination with 'the 25% Rule' (for determining a 'reasonable royalty') – otherwise known as the Relief from Royalty Methodology,' explains the Practical Tax Loose Leaf.
However, it's important to note that this rule only applies where the intellectual property:
Here's how to use the Relief from Royalty Methodology to calculate intellectual property royalties
According to 'the 25% Rule', the royalty rate is generally expected to fall within the range 20% to 33% of PBIT.
But be warned, says SARS: 'Although the relief from royalty method has been in use for many years, in the last decade it has become misused and abused to a great extent. Too many valuations are based on these theoretical 'marketplace royalty rates' to calculate value.'
So make sure you work out your royalty payments for intellectual property correctly to avoid coming under scrutiny from SARS.
For more information on royalty payments, get your hands on the Practical Tax Loose Leaf. In the Practical Tax Loose Leaf we've got a dedicated chapter on royalty payments. In it you'll discover: