Thursday, 13 November 2014

UK patent box "watered down" -- but with a spot of grandfathering

"George Osborne waters down flagship controversial tax break" is the strident headline of this Guardian post by Simon Goodley, subtitled "Patent boxes allow firms to pay much lower taxes on profits from patented inventions, but critics say it gives UK too much of a fiscal advantage". According to this article, in relevant part:
"George Osborne has watered down one of his flagship policies following a long-running dispute with Germany over a controversial UK tax break. ...

The incentives were introduced last year to encourage hi-tech businesses to commercialise their intellectual property in the UK by charging just 10% tax on the resulting income. But Germany led numerous countries in arguing that the regime encouraged artificial shifting of profits to avoid tax elsewhere.

Osborne described the new agreement as “a great deal for Britain” that protected the UK’s vital scientific research while making sure there were international rules that stop aggressive tax avoidance. It would involve the UK winding down its patent box rebates and joining other OECD countries in only granting tax breaks for patents directly tied to research and innovation at home.

Germany’s finance minister, Wolfgang Schäuble, said: “We have reached an important agreement on patent boxes. Preferential tax treatment of intellectual property must be dependent on substantial economic activity. More and more countries are speaking out against allowing too much leeway for large multinationals to minimise their taxes. Just because something is legal, does not mean it is fair in tax terms. Multinationals must contribute their fair share to public budgets – just like any other company has to.”

The Treasury denied it had performed a U-turn on the issue, although it has previously defended its original policy ... [and] countered that it had won important concessions including so-called “grandfathering”, which will allow intellectual property within existing regimes to retain tax benefits until June 2021".
While the notion of the patent box will continue to attract support, not least among patent-exploiting tax-payers, it would be sad if countries were to engage in an unseemly rush to offer the lowest rate for the sake of attracting the relocation of patents alone: tying the tax break to patents grown within the jurisdiction is therefore a wise proposition.  

Mike Mireles' posts on US thinking about patent boxes can be found here and here
"Death of a Travelling Patent Box" by Rob Harrison can be accessed here
Rob's post on the OECD report which gave the UK's patent box scheme a reasonably clean bill of health is here

Thanks go to Chris Torrero for spotting this item


Anne Fairpo said...

Just to add - the proposal agreed between Germany and the UK has to go to the BEPS working party. It's not a done deal yet that this is what will actually happen but, in summary, the proposal is:

- current patent boxes closed to new entrants from June 2016
- existing claimants can continue to claim relief under the relevant patent box(es) until June 2021
- new/amended patent box regimes to replace existing, with requirement that the R&D leading to the patent be done in the jurisdiction in which the patent box relief is claimed.

It'll be interesting to see whether the EU accepts the last restriction, given it's previously rapped France over the knuckles for a similar restriction in it's R&D relief.

Meldrew said...

So what happens to the flash of inspiration patent, where there is no R but buckets of D required after filing? This looks messy.

Unknown said...

Latest news on this is that the BEPS (Base erosion and profit shifting) working party of the OECD is meeting in January to approve the joint approach from Germany and the UK

Unknown said...

Follow up on Meldrew's comments: the proposal (now called the modified nexus proposal) will allow a company to enter the patent box system for any revenue made from the patented product, even if most of the development work takes place after the filing of the patent. Savvy companies will probably also consider filing additional patent applications on the development work as well.