UK Economy
Germany and UK agree to restrict 'patent box' tax incentives to local R&D
By Michael Hennigan, Finfacts founder and editor
Nov 12, 2014 - 8:34 AM

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Germany and the UK have agreed to restrict 'patent box' tax incentives to local research and development (R&D) activity rather than benefitting from shifting patents and IP (intellectual property) that originate in other jurisdictions.

Before the UK patent box incentives took effect in April 2013 which provides for a tax rate of 10% by 2017 on IP-related profits, patent filings in the UK by German companies surged.

The UK currently uses transfer pricing principles, where functions, assets and risks are assessed to determine whether a company has enough “substance” to claim tax relief.

The European Commission is currently investigating patent boxes and Ireland plans to introduce one in 2015 with an expected low rate of 6%.


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Germany and the UK have agreed a joint proposal to advance the negotiations on new rules for preferential IP regimes within the G20/OECD BEPS (Base Erosion and Profit Shifting) Project.

The proposal is based on the Modified Nexus Approach proposed by the OECD, which requires tax benefits to be connected directly to R&D expenditures, but amends these rules to address concerns expressed by some countries and seeks to address outstanding issues in relation to qualification of expenditures, grandfathering and tracking qualifying R&D expenditure.

The proposal [pdf] is designed to bridge different views of OECD and G20 member countries on the application of the modified nexus approach. Germany and the UK will present this to the OECD Forum on Harmful Tax Practices and seek formal approval by the OECD and G20 at the January meeting of the OECD’s Committee on Fiscal Affairs.

A summit of the G20 (group of twenty) leaders of the 19 biggest developed and emerging economies takes place this weekend in Brisbane, Australia and tax reform is on the agenda.

Both Germany and the UK say they remain fully committed to the successful conclusion of the BEPS negotiations by the end of 2015, "and to making the necessary progress on all Actions within this project in order to do so. The proposal was developed through bilateral discussions between the two countries, seeking to achieve a balance between maintaining countries’ ability to offer such regimes and preventing misuse of them."

The proposal seeks to achieve this through reinforcing the nexus approach to ensure substantial activity is undertaken in the jurisdiction offering the relief, whilst better reflecting the commercial realities of R&D investment by business. It also makes necessary provision for transitional arrangements between existing and new rules, and proposes further work to develop practical means of implementing the Modified Nexus Approach.

  • 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; the 30% uplift refers to the overall expenses for both, outsourcing and acquisition costs;

  • Closure and Abolition of IP Regimes – to allow time for the legislative process, all existing regimes will be closed to new entrants (products and patents) in June 2016. These schemes will be abolished by June 2021;

  • Grandfathering – to allow time for transition to new regimes based on the Modified Nexus approach, IP within existing regimes will be able to retain the benefits of these until June 2021.

Announcing the proposal, George Osborne, chancellor of the exchequer said:

This is a great deal for Britain - we protect our vital scientific research while making sure there are international rules that stop aggressive tax avoidance. Our joint proposal balances the need to allow countries that wish to have these regimes to do so, whilst ensuring that they operate by rules that prevent abuse. This demonstrates the strength of our commitment to the BEPS project that we both helped initiate, and our determination to ensure that we conclude this by the end of 2015."

Wolfgang Schäuble, German finance minister, said:

We have reached an important agreement on patent boxes. 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."

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