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Nexus v transfer pricing

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The UK patent box is based on transfer pricing principles, which define a substantial activity test. Either the IP commercialisation activity passes the test or it does not. Thus, all IP income either qualifies for the patent box or is disqualified.

In contrast, the nexus approach focuses on the location of activity. It uses the underlying R&D expenditure incurred in creating the IP as a proxy for the extent of activity, which then defines the proportion of qualifying income generated from the IP that is eligible for tax relief. In essence, the nexus approach means that substantial activity must be undertaken in the jurisdiction offering the relief. It would restrict the UK patent box relief to profits generated from IP that was initially developed in the UK. This is a far greater constraint than existing patent box rules. It also means that multinationals would have to move their R&D facilities to the UK, and not just their IP profits.

Reproduced from LexisLibrary