Germany and the United Kingdom developed a joint proposal for the consideration of the G20 and OECD member countries in the OECD Forum on Harmful Tax Practices (FHTP).  The FHTP had proposed rules, known as the Modified Nexus approach, based on the location of the R&D expenditure incurred in developing a patent or product.  Germany and the UK’s joint proposal aims to resolve issues some countries had with the Modified Nexus approach.  The joint proposal is based on four elements:

Under the FHTP proposal, qualifying expenditures act as a proxy for substantial activities and are defined narrowly; the joint proposal allows companies to increase (or “uplift”) their expenses by up to 30% to include actual expenses for outsourcing and acquisition costs.

The proposal allows for a transitional phase to allow for the closure and eventual abolition of IP regimes.

The proposal provides for grandfathering of current IP, to allow for the transition.

The proposal calls for the development of a tracking and tracing approach.

Germany and the UK will submit this proposal to the FHTP during its meeting on November 17-19, 2014.