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International Approval For Patent Box Changes

by Lorys Charalambous, Tax-News.com, Cyprus

05 December 2014


The Organisation for Economic Cooperation and Development and the European Union's Code of Conduct Group have endorsed a compromise agreement tabled by the United Kingdom and Germany concerning the UK Patent Box and the design of similar preferential intellectual property tax regimes.

The announcement follows an agreement, brokered by Germany with the UK, that the UK would limit its patent box regime, which provides for a preferential ten percent corporate income tax rate on income from patents. The UK agreed that it would grant this rate only in cases where the patent income is linked to research and development (R&D) activities carried out in the UK.

It has been agreed that the new rules for the UK's Patent Box regime will apply to new participants from June 2016. The new rules will apply fully from June 2021.

The deal will be mirrored by all jurisdictions wishing to offer preferential tax regimes for IP income.

The compromise proposal was presented to the Forum on Harmful Tax Practices at its meeting on November 17-19 and to the European Union's Code of Conduct Group (CCG) on 20 November. It considered the OECD's work on agreeing new rules on the level of substantial activities required for a preferential regime to be considered a tax relief that supports real economic activity so as not to be considered "harmful."

The OECD had proposed a number of methods to determine substantial activity. The UK and three other countries had supported the 'transfer pricing' method, but a significant majority of OECD-G20 members supported the alternative modified nexus method, which was eventually agreed.

The UK Financial Secretary to the Treasury, David Gauke, said on December 2: "The compromise proposal was presented to the FHTP at its meeting from November 17-19 and to the CCG on November 20. The proposal was welcomed and will now form the basis of continuing work by the FHTP to determine how the approach will work in practice. As part of the agreement, countries with existing IP regimes must agree to close these to new entrants by June 30, 2016, and will abolish them by June 30, 2021, after which all countries will be required to operate only nexus-compliant regimes."

"The legislative process to introduce changes to existing IP regimes so that continuing IP regimes conform to the re-modified nexus approach will also begin in 2015. In line with the normal tax policy-making process, the Government intends to consult on these changes, once the FHTP has completed work on the detail of the new rules."

He said: "The changes that the Government has secured to the original approach proposed by the OECD will protect the interests of the UK as an excellent location for technology based businesses by retaining a competitive Patent Box regime, which will now align benefits more closely to R&D activity carried out in the UK. As such, the Government is confident that the new regime will continue to incentivize innovation and its commercialization in the UK."

The deal was agreed as part of Action 5 of the OECD's base erosion and profit shifting (BEPS) plan, which deals with countering harmful tax practices, taking into account transparency and the substance of arrangements.

In Budget 2015, the Irish Government announced that it would soon introduce a Knowledge Development Box tax regime for intellectual property income in 2015, similar to the UK's patent box regime, plans for which are to be confirmed in Budget 2016.

TAGS: tax | investment | business | patents | Ireland | property tax | tax avoidance | interest | revenue guidance | law | intellectual property | Organisation for Economic Co-operation and Development (OECD) | United Kingdom | agreements | multinationals | legislation | tax planning | transfer pricing | Germany | G20 | tax reform | standards | regulation | Legislative Scrutiny | legislation amendments | European Union (EU) | research and development | Europe | Tax

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