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UK bows to pressure over patent box

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12th Nov 2014
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The UK and German governments have reached agreement on a proposal to restrict the UK’s patent box tax relief, in an effort to resolve a dispute over preferential tax regimes for intellectual property days ahead of the G20 leaders’ summit in Australia.

“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,” the Treasury said.

“[It] 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.”

The UK and German governments said in a joint statement: “This approach seeks to ensure that preferential regimes for intellectual property require substantial economic activities to be undertaken in the jurisdiction in which a preferential regime exists, by requiring tax benefits to be connected directly to R&D expenditures.”

The effect would be to restrict the relief to research and development carried out in the UK, the Financial Times reported, noting that the UK had faced international opposition, led by Germany, over its refusal to adopt new curbs.

But some commentators suggested that this week’s agreement heralded a phased abolition of the UK’s existing patent box regime. Pinsent Masons reported the UK had “agreed to put forward a proposal to close its patent box tax break … in a concession to German concerns about artificial shifting of profits between European countries”.

The firm added: “If the proposal is agreed by the OECD Forum on Harmful Tax Practices, the patent box will close to new entrants in June 2016 and will stop operating in June 2021.”

The agreement “mentions a ‘transition to new regimes’ but does not give details of any replacement for the patent box”, it said.

George Osborne said the agreement with Germany was “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.”

German finance minister Wolfgang Schäuble said: “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.”

Ben Jones, tax partner at the law firm Eversheds, said the Treasury’s announcement was not surprising given the “intense scrutiny” of measures designed to increase tax competition. “The UK patent box was introduced as part of a package of measures specifically targeted at making the UK a more competitive business environment from a tax perspective and, in part, in response to similar successful incentives in other jurisdictions such as the Netherlands and Luxembourg,” he said.

The move was “a good example of the UK putting its money where its mouth is regarding the international movement to reform corporate taxation”.

David Quentin, a senior adviser to the Tax Justice Network, said the UK had “agreed to abolish its patent box, only a year and a half after it came into force and a matter of weeks after [financial secretary] David Gauke trumpeted its benefits in glowing terms.”

Quentin, who has claimed that the relief was the product of “disingenuous and hypocritical” thinking, said the ostensible idea behind such regimes was to be competitive. “But of course if everyone has a patent box then there is no particular competitive advantage in having one and the end result is simply that corporate profits derived from intellectual property don’t get taxed anywhere – very nice for the asset-owning classes of the ‘developed’ world but not much fun for everyone else.”

He added: “On the face of it these kinds of ‘competitive’ tax practices are a classic prisoner’s dilemma but there is one major difference; in the prisoner’s dilemma the prisoners can’t talk to each other, but jurisdictions can discuss tax policy. And they can even agree not to undermine each other’s tax bases. And that is what Germany has managed to persuade the UK to do.”

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17th Mar 2015 17:45

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