UK Asks For Input On New Patent Box Regime
On October 22, 2015, the UK launched a consultation on the design of the country’s new “patent box” regime.
The UK is developing a new patent box regime that would comply with the recommendations of the OECD on harmful tax practices. It was agreed at international level that, from July 1, 2016, tax regimes that offer preferential treatment on income from intellectual property (IP) must follow the modified nexus approach. This prescribes that a taxpayer would only be allowed to benefit from a country’s IP tax regime to the extent that it can show that it itself incurred the expenditure, such as on research and development, that gave rise to IP income in that territory.
Chapter 3 of the new consultation paper discusses how the UK proposes to amend its “patent box” to comply with these new requirements, focusing on the elements of the nexus fraction – the proportion of the profit from the IP which may be included in an IP regime; the determination of eligible profits; and the application of nexus in special circumstances.
Chapter 3 states that, under the new method, companies would first attribute turnover and expenses to IP assets (such as patents), products, or product families and calculate a profit for each, then modify this based on the nexus principle. In exceptional circumstances – where the application of the principle does not give a result reflecting the true substance of the company’s development activity, the Government would be able to challenge this, through the “rebuttable presumption,” which would result in the application of a revised fraction.
To apply the nexus principle, a company would need to “track and trace” turnover, expenses, and R&D to an appropriate level, which might be an IP asset, a product, or a family of products. Chapter 4 sets out proposed methodologies for achieving this, covering a range of different scenarios.
Chapter 5 describes transitional issues, including provision allowed by the OECD rules for “grandfathering,” which will allow existing IP to continue to receive the benefit of the current patent box regime for a limited time.
Chapter 6 invites comments on an initial assessment of the impact of these changes. Meanwhile, Chapter 7 summarizes the consultation questions and Chapter 8 explains the overall consultation process.
The new UK regime would require that only nexus-compliant IP regimes operate from July 1, 2016, apart from pre-existing arrangements. Pre-existing arrangements would be allowed to operate until June 30, 2021. The paper states that the Government will propose legislation in the 2016 Finance Bill to amend the current “patent box” rules (rather than replacing them completely) with effect from July 1, 2016. The consultation closes on December 4, 2015.
