New international framework set to harmonise intellectual property box tax regimes
The OECD’s latest initiative aimed at restricting the use of low-tax IP box jurisdictions may mean less scope for some countries to attract multinational businesses.
A number of countries currently include intellectual property box-style regimes as part of their corporation tax system. These include Belgium, Cyprus, Italy, Lichtenstein, Luxembourg, Malta, the Netherlands, Portugal, the Swiss Canton of Nidwalden and the UK. Profits generated by patents and similar intellectual property (IP) that are inside an IP box regime are taxed at a rate usually significantly lower than a jurisdiction’s main rate of corporate tax.
Aspects of existing IP box regimes have been deemed “harmful tax practices” by the OECD’s project to counter Base Erosion and Profit Shifting (BEPS). Extremely low effective tax rates on IP box profits available in jurisdictions such as Cyprus, Malta and the Canton of Nidwalden have led to some multinationals relocating their IP ownership to these locations to take advantage of these rates, while the economic activity generating that IP is located elsewhere.
The new framework
The OECD’s solution is a new international framework known as the modified nexus approach (MNA). The mechanism of the MNA is to restrict a company’s IP profits eligible for inclusion in an IP box based on the proportion of the company’s R&D expenditure which is incurred directly in creating the IP. In other words, R&D expenditure on IP development subcontracted to group companies or expenditure on the acquisition of IP developed by another party will reduce the proportion of IP profits eligible for the preferential tax rate.
The MNA also restricts the type of IP eligible for an IP box to patents and copyrighted software. Many existing IP box regimes include trademarks that will no longer be qualifying IP under the MNA.
Notably, the MNA does not prescribe the rate of tax applicable to IP box profits, which remains at the discretion of individual countries.
The OECD requirement is for IP boxes to be MNA compliant from 1 July 2016 from which date existing regimes are closed to new entrants. ‘Grandfathering’ provisions are permitted for a five-year period until 30 June 2021.
Adapt and survive
When the BEPS project was first mooted, many professionals thought it signalled the death knell for existing IP box regimes. However, rather than abolishing their IP boxes, in most cases countries are planning changes to make their regimes compliant with the OECD’s BEPS framework. Several countries without existing IP box regimes (including Ireland, Switzerland and the US) are now proposing to introduce regimes which will be aligned with the OECD framework.
The OECD framework is likely to lead to harmonisation of the model for determining IP box profits between different countries. There may be less scope for countries to achieve a competitive edge in attracting multinationals if all IP boxes look very much the same. Nonetheless, it seems IP boxes are set to stay as a component of a competitive tax regime.
For more information, contact:
Saffery Champness, UK
T: +44 (0)20 7841 4269
T: +44 (0)20 7841 4099