Germany, a long-time opponent of patent box regimes and of aggressive tax competition more generally, has convinced the UK to reduce the scope of its Patent Box ahead of the G20 meeting in Brisbane this week.
The UK has agreed to grant tax breaks for patents only if they are connected with research and development or innovation activity that is performed in the UK.
Speaking before the UK government released a statement confirming a deal with Germany, Robert Gaut, UK head of tax at Proskauer, said: “The reported agreement between the UK and Germany that the UK will restrict the scope of the Patent Box relief comes after months of speculation and pressure on the UK government. The reports are that R&D will need to be carried out in the UK in order for profits from the relevant patent to enter the regime.”
Germany has previously challenged the UK regime and the UK has now bowed to pressure to change the way the Patent Box operates.
“We were aware from the time the Patent Box regime was announced that some of the UK’s competitor nations felt this gave the UK too much of a fiscal advantage,” said Jonathan Riley, UK head of tax at Grant Thornton. “Now it would appear that the UK will have to water down its legislated tax reliefs for those innovative corporates that wish to register their IP in the UK and leverage off it through new products and sales around the world.”
George Osborne, UK Chancellor of the Exchequer, described the deal as “great” for Britain.
“We protect our vital scientific research while making sure there are international rules that stop aggressive tax avoidance,” said Osborne. “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 [Base Erosion and Profit Shifting] project that we both helped initiate, and our determination to ensure that we conclude this by the end of 2015.”
His German counterpart, German finance minister Wolfgang Schauble, was more direct, saying that preferential tax treatment of IP must depend on substantial economic activity.
“More and more countries are speaking out against allowing too much leeway for large multinationals to minimise their taxes,” said Schauble. “Just because something is legal, does not mean it is fair in tax terms.”
While much of the criticism surrounding patent box regimes has centred on the provision of selective measures, Gaut questioned whether similar breaches of European principles could crop up if the restrictions agreed upon are not applied consistently across the EU.
“It is interesting to consider whether the introduction of such a UK-centric restriction is itself compatible with the fundamental freedoms of European law.”
“It is interesting to consider whether the introduction of such a UK-centric restriction is itself compatible with the fundamental freedoms of European law,” he said.
Bad news for Luxembourg
The agreement between the UK and Germany could mean more bad news for Luxembourg. The Grand Duchy already has the eyes of the world on its tax policies after the LuxLeaks revelations, and given that Luxembourg also has a patent box regime similar to that of the UK (broader in scope, in fact), this is another of its tax policies that is set to come under careful scrutiny.
“There are, of course, several EU member states that also have beneficial IP taxation reliefs. Some of those are more flexible and beneficial than that of the UK’s Patent Box was before the newly-proposed change,” said Gaut. “For example, the range of intellectual property that can enter the special regime in Luxembourg extends to software copyrights, patents, trade marks, domain names, designs and models. The UK Patent Box is purely for patent income.”
“We must now expect renewed pressure from the EU Commission, and from the member states – including the UK – to restrict other IP box rules,” said Gaut.
Reputation a concern for countries, not just companies
"Today’s announcement clearly plays to that agenda and seeks to place the UK in the ‘good tax citizen’ camp, even though it does have a negative effect on our tax competitiveness."
In a sign of the extent to which reputation has become a central tax policy concern, Riley said the reputational element to this issue means the UK has been willing to reform the Patent Box even though doing so will detract from the jurisdiction’s attractiveness.
“Recent OECD announcements on the BEPS exercise and its ambitious plans to create a global tax system have mainly centred on the multinational company IP market and the notion that they can choose to locate and exploit their IP wherever they are offered the best overall tax package. Today’s announcement clearly plays to that agenda and seeks to place the UK in the ‘good tax citizen’ camp, even though it does have a negative effect on our tax competitiveness,” said Riley.
Subscribers and trialists can read an in-depth analysis on patent boxes and the regulatory challenges they face on managingip.com.
This article first appeared on Managing IP's sister publication Internationaltaxreview.com.
You can read more by International Tax Review on Patent Box regimes:
UK Patent Box under threat as European Commission scrutinises regime
Germany wants European patent box regimes withdrawn
Luxembourg comfort letter tax deals could spell trouble for EC’s Juncker
German MinFin could introduce patent box to compete with others in Europe
Navigating the Cyprus IP tax regime
