It is no secret that the favourable tax treatment of IP-generated income (generally known as the IP Box regime), was designed to stimulate hi-tech innovation across the EU. In the recent years, certain G20 countries, perhaps with particular reference to Germany, were unhappy with the number of IP Box regimes developed in the EU, notably extending the favourable tax treatment (in essence lower effective corporation tax) to any IP-generated income as opposed to simply Patent-related income.
It is important to note the following proposals by the UK and Germany, revealed at the latest G20 summit:
The present UK Patent Box will be closed to new entrants in June 2016 and abolished by June 2021. The implication is that a new, reformed UK Patent Box will be in place by June 2016 at the latest, based on the OECD's 'Modified Nexus Approach'. This will only offer tax incentives where significant R&D is undertaken in the UK.
Companies already within the UK Patent Box can hold on to the current benefits until June 2021.
There will be restrictions on qualifying expenditure for the UK Patent Box where R&D work is not undertaken by the claimant.
By June 2015 the OECD will provide guidelines on how to track and trace expenditure for Patent Box calculations.
UK tax practitioners focus on the following positive outcomes from this joint statement:
Replacing the uncertainty of the future of the UK Patent Box regime, it is now clear that the regime will continue to apply albeit in a modified format.
Companies already accessing the UK Patent Box will be able to continue utilizing it for several years and plan ahead for the changes.
Further challenges of this regime by Germany are very unlikely while UK continues being committed to the BEPS project.
There has been no indication that the 10% rate of tax on profits derived from patents will change; just a narrowing of eligible expenditure. Accordingly, there is still incentive to plan in such way as to take advantage of the low rate of income tax.
Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.