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The future of the UK Patent Box

30 January 2014   (0 Comments)
Posted by: Authors: A. Chadwick and others
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Authors: A. Chadwick, J.E. MacLachlan and J.A.D. Wilson (Baker & McKenzie)

The European Commission has issued an opinion that the UK Patent Box amounts to a harmful tax practice. The issue is now on the agenda for a meeting of EU Finance Ministers in December, which may lead to a recommendation that the should UK change aspects of the regime, but is very unlikely to lead to wholesale repeal. Another possible outcome is an agreement on changes to Intellectual Property box regimes that could affect other European countries as well as the UK.

Harmful tax competition

Earlier this year the EU Code of Conduct Group asked the Commission to give its opinion on whether the Patent Box constituted a harmful tax practice by reference to the 5 criteria set out in the Code of Conduct. The Commission cleared the UK on three out of five criteria but considered that the Patent Box failed two criteria because, in the Commission's view, the "active management" requirement for patents developed outside the UK is vague and open to manipulation, and the rules for calculating the tax base do not follow OECD principles.

Code of Conduct Group meeting

Representatives from HM Treasury strongly defended the Patent Box at a meeting of the Code of Conduct Group on 22 October 2013, arguing that the regime is fully compliant with the Code of Conduct, and that to replace the "active management" condition with a requirement that development of patents should take place in the UK would contravene EU freedom of establishment rules.

Member States are divided in their opinions over whether incentive schemes of this type are a legitimate means of promoting economic growth. A minority are fundamentally opposed, taking the view that they exist solely to promote profit shifting. The majority view is that the profit shifting risk exists only if the rules are too widely drawn, and that IP box regimes are a legitimate method of attracting investment. 

In view of these differences of opinion it is not surprising that no agreement was reached on the UK Patent Box (and on two other similar schemes under discussion, namely the Cyprus Patent Box, and some amendments to the existing patents regime in Belgium) at the Code of Conduct Group meeting.

What happens next?

As there was no decision at the Code of Conduct Group Meeting, the matter will now be elevated to the Economic and Financial Affairs Council (ECOFIN), which consists of the Finance Ministers from all the Member States. The Code of Conduct Group will frame the relevant issues for presentation to ECOFIN, whose next meeting is on 10 December. The issues for discussion are likely to be:

  • Can European Ministers reach a decision on the UK Patent Box and the other two regimes? If so, given the need for unanimous approval (including from the UK) for an ECOFIN decision on a tax issue, any agreement on the UK Patent Box is likely to call for changes to the regime rather than repeal.
  • How can equal treatment between Member States be preserved? The reality is that the political dynamic has changed significantly since Code of Conduct approval was given in the past to comparable regimes in other Member States. Accordingly, there is a real issue of equal treatment to be addressed as between those States and the UK, Belgium and Cyprus, which are going through the process now.
  • How does this link in with the OECD BEPS project and any outcome from the "Countering harmful tax practices more effectively" Action in the BEPS Action Plan?

Stop press 

At the ECOFIN meeting of 10 December, it was agreed that the EU Code of Conduct Group will review all nine existing patent box and similar tax regimes within the EU which give preferential treatment to income from intellectual property, to decide (a) whether those regimes promote economic activity or whether they facilitate profit shifting; and (b) how to ensure that the regimes of different member states are assessed in a fair and equal manner. The review will be carried out over the six months to 30 June 2014.

This article first appeared on lexology.com.


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