Criticism on OECD’s Modified Nexus Approach

In a joint statement, two business organizations from the Netherlands and Germany have stated their concerns about the development of the proposals under the OECD’s work on Action 5 of its BEPS project. This Action focusses on tackling harmful tax practices and patent box regimes regarding the IP income. The two federations want the OECD to ensure them that there is a level playing field under the new international rules.

Modified Nexus Approach

The statement of both organizations was a reaction to an announcement made by the OECD about an agreement on the application of the ‘’modified nexus approach’’[1] to harmful IP regimes. The agreement puts an end to the discussion between Germany and the United Kingdom about the limitation of taxpayers’ eligibility to the benefits of an IP regime.


The Federation of German Industries (BDI) and the Confederation of Dutch Industry and Employers (VNO-NCW) mentioned that it is almost impossible to provide only local R&D in an increasingly work-sharing environment. As a result the efficiency of the R&D process might suffer under the ‘’modified nexus approach’’. Additionally, the Dutch and German federations said that the benefits of IP regimes are limited to patents and thus subject to approval and registration processes. Trademarks and other marketing-related IP assets are supposed to qualify for benefits, according to both parties. Moreover, the proposal of the OECD could lead to a discrimination of industry sectors, where certain inventions are not being patented, because of commercial reasons, such as protecting trade secrets. Furthermore, SME’s could be reluctant to obtain a patent, because of the significant administrative and/or financial burdens.

Lastly, the documentation requirements must allow flexibility to accommodate for IP. The OECD should also enable the taxpayer to demonstrate that it has carried the costs of developing the IP in order for them to benefit from the IP box regime. [2]


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