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The scope of the UK’s patent box has been reduced, after government officials agreed a compromise with German counterparts over the controversial tax break for companies.
The move was made in an effort to advance negotiations on new rules for preferential intellectual property regimes within the G20/OECD base erosion and profit shifting project.
The scope of the UK’s patent box has been reduced, after government officials agreed a compromise with German counterparts over the controversial tax break for companies.
The move was made in an effort to advance negotiations on new rules for preferential intellectual property regimes within the G20/OECD base erosion and profit shifting project.
The accord was based on the modified nexus approach proposed by the OECD, which requires tax benefits to be connected directly to research and development expenditures. The stated aim of the UK/Germany plan is to bridge different views of OECD and G20 member countries on the application of the modified nexus approach.
German finance minister Wolfgang Schäuble hailed “an important agreement on patent boxes”. He added, “Preferential tax treatment of intellectual property must be dependent on substantial economic activity.
“More and more countries are speaking out against allowing too much leeway for large multinationals to minimise their taxes. Just because something is legal, does not mean it is fair in tax terms. Multinationals must contribute their fair share to public budgets, just like any other company has to.”
The UK and Germany intend to present their compromise plan to the OECD forum on harmful tax practices, and will seek formal approval at the January meeting of the OECD’s Committee on Fiscal Affairs.
The proposal centres on four elements:
- Uplift of qualifying expenditure: where related party outsourcing or acquisition costs are incurred which do not constitute qualifying expenditure, companies will be able to obtain a maximum 30% uplift of their qualifying expenditure (subject to a cap based on actual expenditure) included within the formula.
- Closure and abolition of intellectual property regimes: to allow time for the legislative process, all existing regimes will be closed to new entrants (products and patents) in June 2016 and will be abolished by June 2021.
- Grandfathering: to allow time for transition to new regimes based on the modified nexus approach, intellectual property within existing regimes will be able to retain the benefits of these until June 2021.
- Tracking and tracing: the forum on harmful tax practices should work to reach agreement by June 2015 on a practical and proportionate tracking and tracing approach that can be implemented by companies and tax authorities, which includes transitional mechanisms for intellectual property from existing into new regimes, and special rules for previous expenditure.
Ben Jones, tax partner at international law firm Eversheds, said the proposed change will reduce the “attractiveness of the UK as a jurisdiction in which to base certain types of businesses. It is, however, a good example of the UK putting its money where its mouth is regarding the international movement to reform corporate taxation.
“The key question will be whether competing tax incentives in other countries will be similarly curtailed such that the UK is not ultimately disadvantaged by this change,” Jones added.
