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Treasury rejects EC's view that UK patent box scheme is ‘harmful tax competition’

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The European Council’s Code of Conduct Group on Business Taxation met on Tuesday to discuss two aspects of the UK’s patent box legislation it regards as harmful. These are: the lack of a specific provision requiring activities to be located in the UK which constitute ‘real economic activity’; and the lower rate of tax allowing a statutory deduction equal to 50% of final profits, which is not in line with internationally agreed principles.
However, HM Treasury has said it is confident that its regime does not breach the EU group’s criteria. In a statement, the department explained that the UK's patent box 'is more tightly defined and imposes tougher eligibility criteria than other similar measures in operation that have previously been considered by the Code Group; for example, those in France, Spain, Belgium and the Netherlands.’
Commenting on the news, Deloitte partner Carmen Aquerreta said that companies do not need to take any action yet. 'The EU group met on 22 October 2013 to debate this point. In the event that it supports the Commission’s view, then we expect the UK government to consider how best to adapt the regime to meet the concerns', Aquerreta said. 'In the meantime, companies can rely on existing law until such time as it is amended, since this is not a State aid issue.’
The development brings into focus the debate surrounding the distinction between harmful tax competition and fiscal competitiveness. Laurence Field, tax partner at Crowe Clark Whitehill, said: ‘It’s interesting how one country’s economic stimulus is another country’s tax abuse. The UK has moved to plug perceived tax abuse involving tax havens, while at the same time creating conditions in the UK that other countries consider abusive ... Companies will need to tread a careful path in the debate around the fairness issue until politicians can agree what they mean by it.’
The news follows a meeting of EU finance ministers in Brussels on 9 July, at which Wolfgang Schaeuble, the German finance minister, called for the withdrawal of competitive tax breaks for patents in the UK and other EU countries. Tax expert Heather Self of Pinsent Masons noted on the firm’s website that the complaint by Germany 'is reminiscent of their proposal for an EU-wide minimum rate of corporation tax many years ago.'
'The tensions around base erosion and profit shifting are building, as each country seeks to show why its system is reasonable and it is someone else’s that needs to change', she said. 'The UK patent box regime is a clear incentive to attract high value investment and is not materially different from regimes in other countries. It seems unlikely that the EU could require it to be fully withdrawn.’