There is a growing debate over whether preferential innovation regimes, such as the UK’s patent box, represent harmful tax practices. As the European Code of Conduct Group (COC Group) could not reach consensus, it referred the UK and Cyprus patent boxes to the Council of Economics and Finance Ministers (ECOFIN).
On 10 December, the Economic and Financial Affairs Council (ECOFIN) stated that it was unable to conclude whether the UK or Cyprus patent box regimes should be regarded as ‘harmful’ tax practices. Given the European Code of Conduct Group (COC Group) has historically determined that other similar regimes were not harmful, and as there is a principle of equal treatment between member states, ECOFIN decided it would be appropriate for the European Commission to reconsider all existing preferential IP regimes. It is proposed that this review should take place under the Greek presidency, with a view to reaching a conclusion by mid-2014.
What will the review involve?
The review will test all the existing regimes against the criteria developed for identifying potentially harmful measures. This will, therefore, include the regimes in Belgium, Cyprus, France, Hungary, Ireland, Malta, Netherlands, Spain and the UK.
It is likely that the debate will focus on the criteria concerning economic substance and OECD principles, in particular, differentiating acceptable incentives that encourage genuine economic activity, from those that purely facilitate profit shifting. Under greatest scrutiny would, therefore, appear to be regimes that have a wide definition of intellectual property (IP) where it may be difficult to directly link the creation of such IP to innovative activity.
Implications for UK patent box
The COC Group originally expressed concerns over whether the calculation methodology was in accordance with OECD principles. I understand this was not debated at ECOFIN as the UK has demonstrated the results produced are consistent with alternative approaches. Crucially this means that one of the key tenants of the UK patent box – that one patent results in all income from a product potentially qualifies – appears not to be under challenge.
In terms of economic substance, the key question will be whether the ‘active management’ test, which does not require research and development (R&D) to be performed in the UK, is harmful. It is understood that the UK remains of the view that, in today’s global business environment, it is not realistic to demand R&D to be performed in the UK. Furthermore, requiring such activity in the UK would breach jurisprudence under European Law.
The expected outcome
Whilst there will now be a period of uncertainty, there is an expectation that a view will be reached in the relatively short term. Unanimous consensus is required to change either existing regimes or the criteria identifying harmful tax practices. This is unlikely as it is understood that calls for change are emanating from a minority, if vocal number, of member states. In the absence of agreement, the status quo is expected to prevail, subject to any wider changes triggered by the OECD’s BEPS action plan.
Even where a regime is found to be harmful, the Commission can only request that domestic rules are amended to omit the harmful measure within a reasonable time frame (they cannot require a country to change its rules). Overall, despite further uncertainty, the UK government appears firmly committed to the UK patent box in its current form.
Home >Articles > What next for the UK’s patent box?
What next for the UK’s patent box?
There is a growing debate over whether preferential innovation regimes, such as the UK’s patent box, represent harmful tax practices. As the European Code of Conduct Group (COC Group) could not reach consensus, it referred the UK and Cyprus patent boxes to the Council of Economics and Finance Ministers (ECOFIN).
On 10 December, the Economic and Financial Affairs Council (ECOFIN) stated that it was unable to conclude whether the UK or Cyprus patent box regimes should be regarded as ‘harmful’ tax practices. Given the European Code of Conduct Group (COC Group) has historically determined that other similar regimes were not harmful, and as there is a principle of equal treatment between member states, ECOFIN decided it would be appropriate for the European Commission to reconsider all existing preferential IP regimes. It is proposed that this review should take place under the Greek presidency, with a view to reaching a conclusion by mid-2014.
What will the review involve?
The review will test all the existing regimes against the criteria developed for identifying potentially harmful measures. This will, therefore, include the regimes in Belgium, Cyprus, France, Hungary, Ireland, Malta, Netherlands, Spain and the UK.
It is likely that the debate will focus on the criteria concerning economic substance and OECD principles, in particular, differentiating acceptable incentives that encourage genuine economic activity, from those that purely facilitate profit shifting. Under greatest scrutiny would, therefore, appear to be regimes that have a wide definition of intellectual property (IP) where it may be difficult to directly link the creation of such IP to innovative activity.
Implications for UK patent box
The COC Group originally expressed concerns over whether the calculation methodology was in accordance with OECD principles. I understand this was not debated at ECOFIN as the UK has demonstrated the results produced are consistent with alternative approaches. Crucially this means that one of the key tenants of the UK patent box – that one patent results in all income from a product potentially qualifies – appears not to be under challenge.
In terms of economic substance, the key question will be whether the ‘active management’ test, which does not require research and development (R&D) to be performed in the UK, is harmful. It is understood that the UK remains of the view that, in today’s global business environment, it is not realistic to demand R&D to be performed in the UK. Furthermore, requiring such activity in the UK would breach jurisprudence under European Law.
The expected outcome
Whilst there will now be a period of uncertainty, there is an expectation that a view will be reached in the relatively short term. Unanimous consensus is required to change either existing regimes or the criteria identifying harmful tax practices. This is unlikely as it is understood that calls for change are emanating from a minority, if vocal number, of member states. In the absence of agreement, the status quo is expected to prevail, subject to any wider changes triggered by the OECD’s BEPS action plan.
Even where a regime is found to be harmful, the Commission can only request that domestic rules are amended to omit the harmful measure within a reasonable time frame (they cannot require a country to change its rules). Overall, despite further uncertainty, the UK government appears firmly committed to the UK patent box in its current form.
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