More thoughts on the UK's IP tax reform document

Now back in the UK, and with a functioning computer again, I’ve been digging a little further into the other IP proposals in the HM Treasury Corporate Tax reform document, and looking at the review of the intangibles tax regime published by HMRC – see earlier post for the patent box proposals.

CFC reforms:

Finance Act 2011 will include some interim reforms to the controlled foreign companies* rules and, in particular, a new exemption for CFCs meeting certain conditions. In particular, the conditions include the requirement that the CFC must receive at most an incidental amount of IP income, where “incidental” ≤ 5%.

Secondly, FA 2011 will include a specific exemption from the CFC rules for a CFC with main business of IP exploitation; provided that the IP and CFC have minimal connection with the UK (ie: this is intended to exempt CFCs that do business almost entirely outside the UK). No specific thresholds are given, but when considering whether the IP has a minimal UK connection, the business should review whether the IP was ever held in UK, and whether any R&D was done in the UK. When considering whether the CFC has a minimal UK connection, the company should consider the extent/nature of any UK equity funding, whether there are any receipts from the UK, and what expenses have been incurred in the UK.

*CFC: for the non-tax specialists – a controlled foreign company is a subsidiary of a UK company that is located in a low/no tax jurisdiction. The CFC rules are intended to ensure that UK companies don’t dump profits into these subsidiaries to divert taxable income from the UK – they achieve this by taxing the UK parent on the profits of the CFC, unless an exemption is available. At present, the rules are rather more restrictive than is competitive or compatible with modern multinational business, and so reform is being considered as part of the corporate tax reform package.

IP tax regime review

HMRC commissioned a review of the IP tax regime, introduced in 2002, from Ipsos Mori. The conclusions aren’t wildly startling:

• The intangibles regime was considered important to decision making, in so far as intangibles were often felt to be vital to business success. However, it was not influential on what decisions were made - it influenced how deals were structured, rather than whether or not they took place at all.
• The UK regime was therefore typically felt to be of little consequence in acquisitions
• Ultimately, the UK regime was viewed as neither favourable nor unfavourable – taxation of intangibles was seen as part of doing business, rather than a direct influence on the decision making process.
• While the tax regime introduced in 2002 was appreciated by companies for making the law clearer, most did not believe that decision making regarding intangible assets would have been any different before this time.

IP taxation - a book review

The second edition of Anne Fairpo's Taxation of Intellectual Property has now been published by Tottel. The book's web page describes this as a ‘must have’ for all tax and accountancy practitioners whose lot it is to advise "commercial organisations of all sizes". According to the publishers this book

"- is completely updated the latest legislation including ITEPA 2003, ITTOIA 2005, Income Tax Act 2007;
- Incorporates the Finance Act 2008;
- Considers the impact of R&D tax credits and 2008 increases;
- provides specialist technical guidance for tax practitioners, set in a commercial context".

Anne, who has contributed to this weblog (here), is an IP tax specialist at Wragge & Co. She is a solicitor and Fellow of the Chartered Institute of Tax, where she is also a Council member and a member of technical sub-committees.  If she seems a bit scary to readers of this blog, the good news is that the book is not at all scary. It has a very comfortable feel to it: small pages, clear print, lucidly written in footnote-free prose and packed with short, realistic examples that correspond to client problems -- just what you need for an accessible introduction to this often impenetrable subject.  Best of all, the book comes with an online update blog (here).

Bibliographic detail: ISBN 9781845924881 and 978 1 84592 488 1; xvi + 409 pages paperback; £95. 

South African: IP Tax/Exchange control issues

The SA Treasury has embarked on a project to:

- ensure legitimate IP transactions are not unnecessarily complicated by tax
- ensure that tax consequences flowing from common IP transactions are logical and expected
- gauge the impact of our Exchange Control Regulations on IP transactions
- identify “negative” IP tax practices and existing / potential loopholes

In doing so they have called for comments on the legislation, more fully described on Afro-IP here.

The blogger is looking to compile a list of countries that have onerous exchange control provisions relating to IP and would welcome additions from readers.