Wednesday, 2 December 2015
OECD's Base Erosion and Profit Shifting
We’ve already briefly covered news of the OECD’s Base Erosion and Profit Shifting project and how it will affect the various patent or knowledge box schemes to reduce tax for companies based on profits accrued from intellectual property. The final package was put to the G20 Finance Ministers on 8 October in Lima, Peru, and has been adopted. The wonderfully named "Countering Harmful Tax
The report also sets out in detail the concept of qualifying expenditure, which is entitled to the tax credit, and total expenditure which includes elements on which no tax credit can be obtained. Countries will be allowed to define qualifying expenditures as long as these are only related to R&D activities - it should not include interest payments, building costs, etc. Qualifying expenditures do not include payments to third parties to carry out R&D work.
It is also clear that only patents and similar rights, such as software, will be entitled to the benfits. This will rule out some countries’ schemes that have extended the benefit to design rights, copyrights or trademarks but there may be openings for smaller companies to include further rights.
The overall income that can benefit from the scheme must be derived from the IP asset itself, such as a royalty, capital gains or sale.
It was the introduction of the UK’s scheme that triggered the OECD work, particularly as Germany had objected to the scheme. The report will allow the UK and other countries to continue with their schemes with some minor modifications, and the UK has now published proposals for modification of its scheme. We’ll be interested to see whether Germany does introduce a scheme.