The future of ‘Patent Boxes’ - the OECD’s adoption of a joint proposal by UK and Germany
02 December 2014
In a written ministerial statement issued today, the Financial Secretary to the Treasury, Mr David Gauke, confirmed that the Organisation for Economic Cooperation and Development (OECD) has adopted all of the proposals put forward by the UK and Germany to resolve uncertainty over the future of preferential intangibles regimes, such as the UK’s “Patent Box”.
Carmen Aquerreta, tax partner and head of the Deloitte Patent Box team, comments:
“This is good news for the UK. We’re another step closer to finalising the future direction of the UK’s innovation tax regime, and companies that have been delaying decisions can move forward. We have an excellent track record of investing in R&D. Many UK groups have significant historic R&D spends which will translate into substantial future patent box claims.
“Detailed rules on tracking and tracing R&D costs still need to be agreed. We expect the OECD to consult on the detailed rules, and UK business should be prepared to make its views known. Now is the time to start thinking about how to make the nexus method work in practice.”
Notes for editors
Patent box regimes are intended to incentivise the development and commercialisation of IP through tax reliefs; there are currently eleven regimes in Europe that favour the taxation of intellectual property, including the UK’s “Patent Box”. However, there are concerns that such regimes can be used to shift profits artificially to low tax jurisdictions. The OECD’s Forum on Harmful Tax Practices has been requested to review intellectual property tax incentives as part of the Base Erosion & Profit Shifting (BEPS) project,. In September it concluded that reform was needed to ensure that such incentives are linked to substantial activity, and suggested two possible approaches to achieve this.
In November, the UK and Germany reached a conceptual compromise agreement that the so-called “nexus” approach is the most appropriate. The nexus approach is predicated on a link between historic R&D expenditure and the income arising from the patents developed, with upfront R&D expenditure treated as a proxy for substantive commercialisation activity. It requires taxpayers to be able to track and trace historic R&D expenditure, possibly over many years.
The agreement allows existing regimes to remain open to new entrants until 30 June 2016, with the legislative process to adopt the nexus approach underway from 2015. The transition to nexus must be complete by 30 June 2021.
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