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Patent box stakeholders address EU code of conduct

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HMRC held a patent box stakeholder engagement meeting on 10 April 2014, in light of the continuing review of the EU’s preferential intellectual property (IP) regimes by the EU Code of Conduct Group. According to Deloitte: ‘The Code of Conduct Group expects to align with the OECD’s work on harmful tax practices,’ adding: ‘We understand that the OECD Forum on Harmful Tax Practices is considering two methods of ensuring that preferential IP regimes reward only substantial economic activities conducted by the entity claiming the benefit’.

The two methods are as follows: the first involves ‘the strict application of transfer pricing principles to ensure that appropriate intangibles-related returns are delivered to the entities supplying the “significant people functions” involved in the development of technical IP, the control of associated risks and the provision of the required asset base’; while the second involves a ‘nexus test’ which ‘requires a comparison of development expenditure incurred by the entity with expenditure incurred globally by all parties associated with the creation of the IP asset.’

The UK is said to favour the transfer pricing method, which is already designed into the current patent box proposals. Deloitte reports that while any change is unlikely until 2017, with advance warning and consultations expected on any changes to the current UK patent box design, HMRC has said it is willing to meet interested parties so as to get their views on the ‘nexus test’ and address any concerns.