Dutch, German firms urge fair patent box changes

Two business federations from the Netherlands and Germany have urged the Organisation for Economic Co-operation and Development to ensure that there is a level playing field under new international rules proposed for preferential regimes for intellectual property (IP) income, reports Tax News.

The two organizations’ statement concerns the development of proposals under the OECD’s work on Action 5 of its base erosion and profit shifting (BEPS) project, which is focused on tacking harmful tax practices and patent box regimes for IP income in particular.

The OECD announced last month that an international agreement had been reached on the application of the “modified nexus approach” to harmful IP regimes. The agreement follows proposals put forward during discussions between Germany and the United Kingdom, which would limit a taxpayer’s eligibility to the benefits of an IP regime to the extent that it can show that it itself incurred expenditures, such as on research and development (R&D), that gave rise to the IP income in that territory.

In a joint statement to the OECD, the Federation of German Industries (BDI) and the Confederation of Dutch Industry and Employers (VNO-NCW), noted: “While we understand the general target of G-20/OECD [efforts] to limit the tax benefits for outsourced R&D, it has to be kept in mind that in an increasingly work-sharing environment it is nearly impossible to provide only local R&D. The direct result of the ‘modified nexus approach’ therefore could be that the efficiency of R&D processes might suffer.”

The two bodies pointed out that “under the modified nexus approach, the benefits of IP regimes are limited to patents and other functionally equivalent IP assets that are legally protected and subject to approval and registration processes. Trademarks and other marketing-related IP assets are not supposed to qualify for benefits.”

The BDI and VNO-NCW noted that the modified nexus approach “leads to a discrimination of industry sectors, where certain inventions might not patentable, or are not patented due to commercial considerations (for example, to protect trade secrets).” It noted that SMEs might also avoid obtaining a patent due to the great administrative and/or financial burden attached.

The BDI and VNO-NCW called on the OECD to ensure “that where a taxpayer can demonstrate that it has borne the expenses of developing the IP, the fruits of such IP should be allowed to benefit from the IP box regime. At the same time, the documentation requirements must allow some flexibility to accommodate for IP which is developed out of experience or by chance, where the costs are difficult to trace retrospectively.”