The OECD has reached agreement* over the basis on which taxation of IP rights should be dealt with to avoid overly generous tax concessions as part of an attempt to create a more level playing field and reduce tax competition between states.
This will severely restrict the opportunities to exploit “Patent Box” regimes which had become the subject of complaints from some member states as a reaction to profit shifting and so called “base erosion”.
Under the new approach (proposed by Germany and the UK) members of OECD will introduce a “modified nexus approach” whereby the tax breaks accorded to patents and other IP will be limited so as to reflect R&D activity in the member state giving the tax break, as opposed to, for example, IP acquisition costs and costs of outsourcing of R&D costs.
Thus the claimant will only be able to rely on an IP tax break regime to the extent that the taxpayer can show that it can show that it incurred the R&D which gave rise to IP income. A 30 per cent up-lift of qualifying expenditures may be permitted subject to certain conditions. Trade marks will be excluded from such regimes.
Whilst transactional provisions will protect existing claimants under a phase out period, whereby no new claimants under the old rules will however be permitted after 30 June 2016 and the old regimes will disappear altogether after 30 June 2021.
In the EU, the UK and Luxembourg have already announced changes to their controversial regimes to meet these requirements. The UK Patent Box had hardly got going before it was choked by these new rules, as discussed in our previous article.
More detailed regulations will issue in the summer setting out the detailed requirements for recording R&D expenditure, preventing schemes to allow abuse of the transitional provisions and providing more precise definitions of the eligible IP where that IP is not protected by patents, a feature of some of the non-UK regimes.
Nevertheless, opportunities remain for UK and overseas-based companies to benefit from the wider UK scheme and attention should still be paid to this tax concession which remains fully legal, if now relatively short lived.