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Exporting Expertise Vital For Grants


The Sydney Morning Herald
May 7, 1996, Peter Lavelle

Export grants are available to companies that trade expertise or know-how- but there are pitfalls in the eligibility criteria…..

Small businesses exporting their expertise into the Asian region could be missing out on thousands of dollars in government marketing assistance because they don’t know they are eligible, or because they haven’t structured their affairs in a way to satisfy Austrade grant eligibility requirements.

According to Mr Warren Cross, a lawyer specialising in international trade and intellectual property, businesses may not know that the rules have changed in the past few years to allow more firms exporting expertise to become eligible for marketing grants under the Export Market Development Grant Scheme (EMDG).

Meanwhile, other companies exporting know-how who may have thought they were eligible for grants have been knocked back because they haven’t structured their joint venture partnerships so as to fit the strict EMDG eligibility criteria.

But Mr Cross says he has obtained a private ruling from Austrade which will clear up some of the confusion. The ruling says that companies exporting expertise and know-how overseas must show there is a clear link between know-how exported and the income earned from it if they are to qualify for a grant.

Income from the joint venture partner must be in the form of royalties licence or success fees, and not dividends, for the company to be eligible.

The EMDG scheme allows eligible businesses a retrospective cash rebate on overseas marketing costs. Applicants have from July to November to apply for the costs incurred the previous financial year.

The rebate is 50c in the dollar after the first $15,000, up to a maximum rebate of $200,000 per company or $250,000 per group of companies. Companies with more than $25 million dollars in export earnings annually are ineligible.

Any marketing items qualifies: airfares, promotional material and trade exhibitions, costs of setting up and maintaining an overseas sales office and/or costs of appointing an overseas representative. The only significant overseas territory excluded is New Zealand.

The grants are for a maximum of 11 years. For the first two years, the company doesn’t have to show export earnings, giving it start-up time while it is eligible for assistance.

After that, the maximum grant amount declines as a percentage of earnings according to a sliding scale – in year three, the maximum grant is 40 per cent of export income, in year four 20 per cent, 10 per cent in year five and 7.5 per cent in year six. So earnings must increase if the grant level is to be maintained.

The scheme was set up in 1974 and at first applied mainly to manufacturers. Service companies later became eligible, but were limited principally to the construction, mining and agriculture industries.

With the increasing recognition of the role of small business in exporting, other service companies were allowed into the scheme, where they were deemed to be exporting expertise or know-how.

Originally this was restricted to technical and scientific know-how, but two years ago this was changed to include all companies exporting expertise.

Hence, many companies that previously could not get the grants may now be eligible, says Mr Cross.

Many companies have just rung up Austrade and said, for example: “I’m a financial services company, do I qualify?” Austrade may have said no, but where the export activity is in fact know-how, not services, they do qualify, Mr Cross says.

Companies potentially affected include those in advertising, public relations, insurance, the financial sector, including fund managers and investment services.

The distinction between exporting know-how and services is important.

If you set up an operation overseas to deliver the services yourself, you are a service provider. When you show someone else how to deliver the service, you are an expertise provider.

Expertise qualifies under the export grants scheme, the service doesn’t. Why this is so has more to do with the way the grant scheme evolved over the time than anything else, according to Mr Cross.

In practise, exporting know-how means forming a joint venture where your partner supplies the services in the foreign territory and you provide know-how.

A typical example would be a franchise operation. The franchisor is exporting intellectual property  - in the form of a trade mark, an operating manual and general expertise. What ‘s being exported is the know-how, not the service, says Mr Cross – and that will qualify you for the grant.

But to be eligible, Austrade has ruled that there must be a direct link between the income and the know-how exported. Furthermore, earnings must be in the form of royalties, a licence fee or a success fee.

For example, a franchisor must receive a licence fee specifically for the intellectual property, Mr Cross says.

It is not enough to receive payment as dividends from the joint venture company. Austrade’s view is the scheme is there to help companies to export Australian intellectual property, not help local companies making foreign investments.

To satisfy Austrade, both the know-how and the link between know-how and income stream must be documented.

The agreement between the parties should state that you are providing the intellectual property, what that actually is, and how you will be paid for it.

Earnings receipts must show they are for royalties, licence or success fees, and not dividends. Frequently, companies fail to do this; they incur marketing expenses thinking they’ll qualify for the grant, and then get knocked back, often without understanding why.

And once the agreement is set up between the parties, it’s generally very difficult to change, so they may in effect be locked out of the scheme indefinitely, Mr Cross says.

One possible cloud is that the scheme may not be destined to last much longer if the Department of Finance has its way. There is speculation that, despite its pitch to small business during the election campaign, the Federal Coalition may cut or prune the scheme in the August Budget in its effort to cut the Budget deficit.

But before they hit the panic button, exporters should remember the last time the Coalition considered this as a policy. During the 1987 election campaign, the (then) Opposition leader John Howard proposed abolishing the scheme, only to drop the idea after an outcry from business. A similar outcry is already well under way.