Following our article at the end of last year on the potential changes to the UK patent box regime further details have been released on the new regime, timings and additional work to be done.
On 6 February 2015, the Organisation for Economic Co-operation and Development (OECD) published a paper titled ‘ Action 5: Agreement on Modified Nexus Approach for IP regimes’ as part of the Base Erosion and Profit Shifting (BEPS) review.
The paper is short on detail (it is only 3 pages long) but it builds on the joint proposal put forward by the UK and German governments in November 2014.
The ‘modified nexus approach’ as put forward by the UK and Germany has now been generally accepted and will apply such that eligibility for IP tax benefits will only be available where substantial R&D activities tied to that IP have been carried out in the same jurisdiction.
Up-lift of qualifying expenditure
As related-party outsourcing and acquisition costs will not be treated as qualifying expenditure an ‘up-lift’ equal to the amount of actual expenditure on those activities will be allowed to the extent it does not exceed 30% of the amount of qualifying expenditure in the claimant company.
Timing, grandfathering and reporting issues
As expected the existing Patent Box regime will be closed to new entrants by 30 June 2016 or, if earlier, the date that a new modified nexus approach regime comes into effect. ‘New entrants’ includes not only new taxpayers who had not previously benefited from the regime but also taxpayers already benefiting from the regime if they acquire new IP assets.
The paper also provides that grandfathering provisions can be put in place but must be abolished within 5 years of the new regime coming into effect, which would therefore be 30 June 2021 at the latest.
Further work to be done
The OECD identifies additional areas of work still to be carried out by the Forum for Harmful Tax Practices as follows:
i) Agree a practical approach to track and trace R&D expenditure to revenues from the relevant IP. Transitional rules will also need to be considered here as it is recognised that this information may not be readily available for IP claims under historic regimes.
ii) Introducing safeguards to prevent new entrants from electing into existing regimes simply in order to benefit from the grandfathering rules.
iii) Provide guidance on the definition of qualifying IP assets – currently anticipated to include patents and other IP assets that are legally protected and subject to an approval and registration process. However, it is less clear whether copyrighted software or other technical developments or research that cannot be patented will be included.
We will continue to monitor any developments but as any legislative processes to make the changes are prescribed to commence in 2015, it is expected that there will be further updates shortly.