Innovation
'Patent box' tax schemes based on substance; Anti-evasion deal for signing in Berlin
By Michael Hennigan, Finfacts founder and editor
Oct 29, 2014 - 8:37 AM

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Germany has again criticised schemes that apply a low corporate tax rate to profits from intellectual property (IP) that may not be developed in a country - the scheme is commonly known as a 'patent box.' Meanwhile in Berlin Wednesday, finance ministers from about 30 countries from 50 represented, will sign a deal that will strike a significant blow against banking secrecy, and tax fraud/ evasion.

"Banking secrecy, in its old form, is obsolete," Wolfgang Schäuble, German finance minister, says in an interview in the mass-circulation German daily Bild on Wednesday.

It is "no longer appropriate at a time when people can transfer their money all over the world at the press of a button via the Internet," he added, and today he hosts s two-day meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes, which was founded in 2000  as a multilateral framework that brings together 120 countries under the auspices of the Paris-based Organisation for Economic Cooperation and Development (OECD).

Finance ministers will today sign an international agreement on the automatic exchange of tax information, which will designate which institution in each country is responsible for transferring tax data to other member states.

The automatic exchange of tax information on an annual basis will make it considerably easier for revenue authorities to obtain financial information from other countries, thus enabling them to ensure fair taxation. As a result, it will be much more difficult for tax evaders to hide sources of income from tax authorities or to rely on the inability of authorities to tax anonymous capital. "In other words, banking secrecy is a thing of the past," according to the German finance ministry.

More than 60 countries and jurisdictions have committed to adoption of the exchange standard including Switzerland, Luxembourg and Austria - existing operators of personal tax evasion havens.

Double Irish tax scheme axed; Conventional wisdom wrong again - Part 1

Replacing the Double Irish with Knowledge Development / Patent Box - Part 2

Patent box

The Times of London reported Monday that the UK and Germany had reached an agreement in principle "to limit a tax relief scheme used by Britain to keep biotech and other innovative firms based in the country" to the profits of actual investments in R&D.

The report said: "Germany has clashed with Britain over the 'patent box' brought in last year to charge a reduced rate of 10% corporation tax on cutting-edge companies."

Derek Scally in The Irish Times today says: "Germany has warned that corporate tax subsidy arrangements known as 'patent boxes' are acceptable in the European Union only as a reward for research and investment by companies in member states, not as a new tax-avoidance tool."

“With Britain we are in agreement that brass plate companies cannot be allowed use patent or licence box arrangements,” said a senior German official, according to The Irish Times. “A patent box is not damaging per se but it is necessary that substantial research is going on in a country through a real, substantive company before that company is rewarded with tax breaks.”

On Tuesday speaking on a five-day US trade mission, Richard Bruton, enterprise minister, made the implausible claim that he had received “very positive feedback” on the plan to phase out the Double Irish tax scheme, in meetings with US companies in Boston on Monday and the Washington DC area yesterday.

He invited the companies to participate in the Government’s consultation process on the planned patent/ knowledge box, which will allow companies separate income from intellectual property and pay a different tax rate on it.

Times change and last October Bruton defended the Double Irish tax dodge when it was reported that Google diverted 41% of its global revenues to Ireland in 2012.

The Financial Times reported the Google story including underbooking of British sales in the UK: It said:

Richard Bruton, Ireland’s business minister, said..he was not concerned that the latest accounts filed by Google would turn the spotlight on Ireland’s role in multinational tax avoidance.

'The Irish tax regime is a statute based, transparent and clear system,” he said. “Ireland remains and will make no apologies for seeking to be competitive in this area.'"

Last week, the German  state of Hessen issued  a press release announcing plans to introduce a legislative initiative to the Federal Council (Bundesrat – the German Upper House) with the objective to support economic investment and to curtail aggressive tax  planning. The topics of the initiative as detailed by EY, the Big 4 accounting firm, are:

  • Introduction of a measure against “patent box” and similar intellectual property taxation regimes established by other jurisdictions. According to the proposal, royalties paid to any group affiliate should only continue to be deductible as an expense in Germany if those payments are subject to tax in the hands of the affiliated recipient with a tax rate of 25% or higher;
  • Temporary introduction of the declining-balance tax depreciation method for investments made during years 2015 and 2016;
  • Repeal of LIFO (last in, first out) as an allowed convention for inventory tax accounting purposes;
  • Repeal of the capital gains exemption for stock sales of corporate sellers, if the seller’s interest in the sold company’s shares is below 10%.

The state of Hessen estimates a €400m net tax revenue loss upon implementation of the measures.

Related tax links

Ireland's small gain from Apple's possible EU tax probe payment

European Commission: Apple given special tax deals by Ireland

Apple's foreign tax rate tumbled after 2007 Irish 'advanced opinion'

G20 finance ministers reaffirm commitment to tax reform; Ibec takes Finfacts' advice

OECD & Tax: Everything grand in Ireland's Republic of Spin?

OECD proposes biggest reform of global business tax rules since 1920s

Finfacts submission to Department of Finance consultation on corporation tax reform

OECD BEPS Project submission from Finfacts: Ireland should embrace corporate tax reform - - includes analysis of underperforming indigenous tradable sector.

Irish corporate tax policy like property bubble driven by short-term interests

IMF explains “Double Irish Dutch Sandwich” tax avoidance

US company profits per Irish employee at $970,000; Tax paid in Ireland at $25,000

Estonia heads OECD tax competitiveness index; Ireland at 15, US at 32


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