A joint proposal advanced by the UK and Germany that put limits on preferential intellectual property regimes has been adopted by the OECD Forum on Harmful Tax Practices (FHTP) as a new starting point for drafting guidance under Action 5 of the base erosion profit shifting (BEPS) plan, UK Financial Secretary to the Treasury, David Gauke said December 2.
Gauke said the UK/German proposal was presented to OECD-G20 members at the FHTP meeting on November 17-19 and to the EU Code of Conduct Group on November 20.
“The proposal was welcomed and will now form the basis of continuing work by the FHTP to determine how the approach will work in practice,” he said.
Under the joint compromise agreement, published November 11, the UK joined Germany in endorsing a modified nexus approach for determining if substantial economic activities are undertaken in the jurisdiction in which a preferential regime exists. The approach, outlined in the OECD’s September 16 draft on countering harmful tax practices, requires that benefits provided under an IP regime be tied to expenditures for R&D carried out in the country.
The UK/German agreement liberalizes the approach in the OECD draft, permitting a taxpayer’s non-qualifying related party outsourcing and acquisition costs to be 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 entrants beginning June 30, 2016, but firms with existing arrangements are allowed to use existing IP regimes until June 30, 2021.
The UK was one of only four nations that originally favored a transfer pricing method to determine substantial economic activities. The UK decided to work with Germany to find a compromise solution “in the interests of reaching agreement on this important issue,” Gauke said.
Gauke said that after the FHTP has completed work on the details of the new rules, the government will consult on needed law changes so that continuing IP regimes can conform to the re-modified nexus approach
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