UK Patent Box – a pre-Action Plan recipe?

The UK’s Patent Box system is becoming rather controversial. The scheme is scheduled to provide a predicted amount of £367M (€446M) in tax breaks and was introduced in April 2013.

Ireland also has a history of similar tax relief, with taxpayers saving millions with the Irish Patent Box system. The Patent Box does results in a fairly high reduction in tax revenue for the government per company, but is aimed at increasing the amount of taxpayers and benefiting from long-term technological competition.

The Patent Box regime was put in place in order to promote the international competitiveness of British firms in technological development. Ireland is particularly renowned for attracting foreign direct investment in such industries, but due to the overwhelming benefits provided – free establishment and even government-paid salaries, among several benefits – Ireland has seen the spell being turned against the wizard, as the government’s income hasn’t been shown to provide due return. Precisely because of this risk, the introduction of the Patent Box in the UK has stirred some polemic within the UK, but also in the EU.

The European Commission’s perspective

The UK has fiercely defended its regime, but the European Commission has flung plenty of criticism stemming from issues of tax competition. While the Commission has voiced its support for, and proclaimed the necessity of tax competition, the UK’s recently implemented regime is nevertheless seen as a threat to the fair competition agenda of the European Union. Much like Ireland and the Netherlands that have been targeted for criticism for their overly FDI friendly tax systems, the UK has introduced what the Commission sees as something equally aggressive.

For taxpayers the UK regime is good news: although selective, many firms will find tax breaks in the scheme. To the Commission, on the flip side, the UK may be throwing catnip at MNEs focused on technological development, building an alluring case for their establishment in the UK, to the detriment of other jurisdictions.

Other patent box regimes already exist in The Netherlands, Belgium, Luxembourg, Cyprus, Liechtenstein, Malta, Spain and the canton of Nidwalden. These Patent Box regimes in Europe may in fact be more beneficial to taxpayers than the UK’s. This begs the question of why so much controversy is being generated over the British introduction of the scheme?

Firms relocating?

The pharmaceutical colossus GlaxoSmithKline (GSK) has already announced its intention to invest in Scotland, a move assumed to be connected to the Patent Box regime’s introduction. GSK’s investment was moved to the UK instead of Ireland, a fact on which Barry Heavey, head of life sciences for IDA Ireland, commented: “we're keeping a watching brief on this but so far this is the only significant project that has gone elsewhere as a direct result of the Patent Box”.

Although the UK’s patent box is not necessarily the most attractive, firms have made a move under the prediction that the UK’s tax regime will become even more attractive in the future. AON has now moved its headquarters to London and has become the first Fortune 500 company to move its domicile to the UK. In other industries we also see Starbucks moving to Britain from The Netherlands, allegedly in order get closer to the UK market according to recent news from Reuters.

The impact of the OECD’s Action Plan

The greatest factor for the UK’s win is perhaps the OECD’s BEPS project. Firms anticipate major changes in the transfer pricing landscape and make a move accordingly. It is expected that with the increased information sharing and the outright exposure of MNE’s transfer pricing positions globally, exploitation of low-tax jurisdictions will become a far harder task. The UK’s Patent Box signals attractive provisions within a high-tax jurisdiction, which gives MNEs a bold incentive to choose it over low-tax jurisdictions in the imminence of the Action Plan.

What is the Patent Box regime?

The Patent Box regime is a patent protection system for taxpayers active in technological development, giving more benefits to firms with patented inventions. The regime allows firms to enjoy a lower tax rate (10%) for their corporate tax on profits earned after 1 April 2013 from the firms’ patented intellectual property. This rate applies to profits made from royalties received from licensing patent rights, selling the patent, compensations for patent right infringement, or indirectly from products using the patent.

In order to be eligible for the Patent Box regime a firm must pay corporate tax and must make a patent that qualifies it for the regime. The firm must also own or exclusively license-in the patent and must have taken qualifying development on this; otherwise, a firm may also qualify when belonging to a group that owns the patent.

Patents eligible for the regime include patents granted by:

  • UK Intellectual Property Office
  • European Patent Office
  • The following countries inside the EEA: Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Romania, Slovakia and Sweden.
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