Germany and the UK have agreed to a proposal that would put limits on preferential intellectual property regimes, including the UK’s patent box regime, for purposes of drafting uniform rules responding to Action 5 of the OECD/G-20 base erosion profit shifting (BEPS) plan.
The compromise proposal breaks an impasse in negotiations over how to address IP regimes under the BEPS plan.
Most countries involved in the OECD BEPS project have favored a nexus approach, outlined in the OECD’s September 16 draft on countering harmful tax practices, which requires that benefits provided under an IP regime be tied to expenditures for R&D carried out in the country.
The UK, however, had favored a transfer pricing approach, which allows a country to provide tax benefits for all income generated by IP if the taxpayer locates important functions in the jurisdiction, owns assets that generate the tax benefits, and bears risk associated with the assets.
Under the joint compromise agreement, announced by HM Treasury on November 11, the UK joins Germany in endorsing a nexus approach with the modification that a taxpayer’s non-qualifying related party outsourcing and acquisition costs are included in qualifying R&D expenditures, up to an amount equal to 30 percent of the qualifying expenditures.
The joint agreement also provides generous transition rules: existing IP regimes must be closed to new products and patents beginning June 2016, but firms with existing arrangements are allowed to use existing IP regimes until June 2021.
The plan also calls for the OECD Forum on Harmful Tax Practices to develop a “practical and proportionate” tracking and tracing approach by June 2015.
Germany and the UK intend to submit the proposal to the OECD Forum on Harmful Tax Practices at its November 17-19 meeting, and will seek to have the proposal form the basis for future negotiations on Action 5.
“This is a great deal for Britain – we protect our vital scientific research while making sure there are international rules that stop aggressive tax avoidance,” Chancellor of the Exchequer George Osborne said while announcing the proposal.
Ireland has recently announced that it intends to offer a “knowledge development box” regime to give preferential treatment to IP income. No details are available on Ireland’s program, as it is still being developed, so it is unknown how Ireland’s plan would fit into the agreed scheme.
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