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What has been agreed on Patent Box reforms?

So, just five weeks after a UK government minister defended the country’s Patent Box scheme, George Osborne has announced that he has agreed with the German finance minister to make changes to it. But what changes has he agreed?

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.

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