On October 3, Treasury minister David Gauke told the Securities Industries Conference that he rejected any suggestion that the UK’s Patent Box facilitates profit shifting.
“Let me be clear here: categorically, it does not create an opportunity for businesses to reduce their taxes without increasing their value to the UK economy.”
He went on to defend the use of a transfer pricing approach to the Patent Box, arguing that the so-called nexus approach – favoured by many of those EU governments that have been critical of the UK’s Patent Box scheme – could “infringe the freedom of establishment” and be “overly restrictive”.
The nexus approach would also require “incredibly detailed tracing of expenditure and income”, he said, placing a heavy burden on businesses and tax authorities.
It may not come as much surprise, therefore, to find that Osborne yesterday revealed in a joint statement with his German counterpart, finance minister Wolfgang Schauble, that they are proposing new rules based on a “nexus” approach.
(You can read more about the statement and reaction to it in an article by our sister magazine International Tax Review).
But what do the changes mean? I spoke to one patent attorney this morning who concluded that the wording of the statement – confusing and avoiding the term “patent box” completely – suggested that the UK Treasury had been caught off-guard. The Patent Box – at least as it is now formulated – is likely to be a casualty of wider EU machinations and behind-the-scenes negotiations between the UK and Germany over reform of the EU Treaty.
The inconclusive statement raises as many questions as it answers: it talks about closing the scheme to new entrants in 2016, and abolishing schemes by 2021, yet it doesn’t make clear whether the existing scheme will be changed to a nexus, rather than transfer pricing, approach within that timeframe.
We will try to get more information in the coming days about how the reforms – which will require legislative changes – will affect IP owners and their advisers. If you have insights into how they will work in practice do let us know.
