Reasons for Underpayment of Duties

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Licensing is one of the most common ways to monetize Intellectual Property . It involves the temporary transfer of the patent owner's rights to use the product/invention to a third party. This is done in exchange for a fee or royalty or both. The profit stream that licensing provides is a valuable proposition for the owner.

Unlike the sale of intellectual property, where there is a one-time payment transfer, the IP Licensing Agreement is an ongoing transaction for the contractual period. This makes it important to keep tabs on the amount of royalties received and ensure that the licensing agreements are not being undervalued. Below we understand how royalties can be underreported, when designing foolproof IP Licensing Agreements , and the circumstances that require forensic royalty audits.

Table of Contents

Clear Drafting of Licensing Agreements for Intellectual Property
Assessing the Need for Forensic Investigations
Benefits of Royalty Auditing
Conclusion
Reasons for Underpayment of Duties
There can be a number of reasons for underreporting royalties. Costa Rica Phone Number Library According to a recent study, nearly 89% of licensees do not report royalties. Understanding these reasons is crucial if one wants to take precautionary measures and ensure a steady flow of income. While fraud is the first logical assumption in such cases, there are several other ways in which licensees knowingly or unknowingly underpay royalties, including:

Misinterpretation of the Agreement: Everyone wants to interpret things in ways that are favorable to them and the Free IP License Agreement is no exception. Since agreements are not drafted by the licensee or the licensee, there is room for interpretation. Even if the agreements are written in the clearest of ways, the language used by lawyers can lead to clauses that the accounting team can misinterpret. The only way to avoid this is to stay vigilant and delve deep into the licensee’s accounting system in areas related to the royalty agreement.
Calculation of gross to net sales: IP Licensing Agreements will always have a definition of ‘net sales’ that lists the specific deductions offered. However, there are times when the licensee may use vague language in a contract and stretch these definitions. Therefore, the exact details of the calculations, from gross to net sales, must always be requested in order to calculate royalties. If any questionable deductions are found, they must be discussed immediately with the licensee.
Calculation Errors: While we may live in a world of sophisticated spreadsheets and other technological tools that promote accuracy, errors can still occur. These errors may not be present in the primary audit data but in supporting documents that the lice