EU Tax Working Group to Propose Retool of Patent Boxes
European Union nations that offer “patent box” tax breaks should retool their laws so that only deserving companies can claim benefits tied to technical innovations, according to a draft report from a European Union working group.
Countries that use this kind of technology tax break should start legislative work next year on redesigning their rules so they can phase out the old system, according to the report, which will be discussed by EU finance ministers on Dec. 9. The group recommends that existing tax breaks be closed to new entrants as of June 30, 2016, followed by a total shift to revamped rules by mid-2021.
The proposal’s goal is to ensure governments don’t grant tax breaks on patent income for technology developed outside their jurisdictions. The working group recommends that the EU adopt a version of the “modified nexus” approach developed by the Organization for Economic Cooperation and Development.
Patent-box reviews are part of a global clamp-down on corporate tax-avoidance as governments struggle to increase revenue and reduce deficits. Germany, France and Italy have led calls for EU nations to align tax policies so companies don’t escape duties by setting up shop in sympathetic nations.
None of the EU’s existing patent-box tax breaks complies with the new standard, according to the EU panel, known as the Code of Conduct Group on Business Taxation. It wants countries to start next year on legislative work to adopt the new standard for research and development-based tax breaks.
‘Knowledge Box’
Irish Finance Minister Michael Noonan said on Dec. 2 that his nation will soon start work on a “knowledge box” tax break. Ireland will design its rules to comply with EU and international standards, he said in a Dublin speech.
Under the proposed new approach, “businesses using already existing patent-box regimes might see a reduction in income receiving preferential treatment, as R&D expenditure to develop the patent must be undertaken in a more limited number of entities, including the company holding the relevant patent, to qualify,” the working group said in the report, which is dated Nov. 28.
The Netherlands is seeking a change to the report’s wording so that other kinds of research and development could qualify for tax breaks, not just patents. It wants the compromise to include government-certified innovations “derived from technically innovative development, technical scientific research or technical research on substantial improvement of production processes or software,” according to a Dec. 3 amendment that has not yet won working-group approval.
State-Aid Investigations
The working group’s report may set the stage for new development in EU state-aid investigations into tax breaks. The EU has sought details on patent boxes from Belgium, Cyprus, France, Hungary, Luxembourg, Malta, U.K. and the Netherlands.
EU Competition Commissioner Margrethe Vestager said last month that the working group’s report will “give us a complete overview of the construction of patent boxes.” In a Nov. 21 interview with Agence Europe, she said she didn’t want to interrupt the group’s work by opening a formal investigation.
Separately, the Code of Conduct Group will consider whether Gibraltar is in compliance with EU tax rules on inbound profit transfers, according to the draft report. Regarding shell companies, the group reviewed information from the U.K. and Gibraltar and found that “the treatment of shell companies established by individuals to hold their assets falls within the code,” according to the draft report.
Former EU Competition Commissioner Joaquin Almunia announced a probe of Gibraltar’s tax deals in his last month on the job. Gibraltar said on Oct. 1 that Almunia was acting in the interests of Spain, his home country.
