A patent box is a special tax regime for intellectual property revenues. It is also known as intellectual property box regime, innovation box or IP box.
Contents
- Origin
- UK Patent Box regime
- History
- Overview
- How it works
- How to claim
- Qualifying patents
- Qualifying income
- Qualifying company
- Details in the legislation to look out for
- Anti avoidance
- Other technology tax reliefs
- Government working group
- OECD Forum for Harmful Tax Practices and the EU Code of Conduct Group
- Anglo German accord on the UK Patent Box
- References
Origin
The concept was first introduced in 2000 by the Irish and in 2001 by the French Tax Authorities as a reduced rate of tax on revenue from IP licensing or the transfer of qualified IP. In Europe IP-Box regimes Belgium, Hungary, Luxembourg, Netherlands, Spain and the United Kingdom have also introduced similar schemes.
UK Patent Box regime
The Patent Box in the UK is a tax incentive introduced in 2013 designed to encourage companies to make profits from their patents by reducing the UK tax paid on those profits.
History
The UK Patent Box went live in April 2013. The UK government wants to encourage high-value growth in UK plc through a competitive tax regime that supports UK R&D from conception to commercialisation. The Patent Box forms a key part of this strategy by encouraging companies to commercialise their patents and R&D in the UK. Other countries (eg.Belgium, Luxembourg, the Netherlands) already operate schemes to provide incentives for companies to retain and commercialise existing patents
The scheme was first proposed in the 2009 Pre-Budget Report and went through various iterations and public consultations until final legislation was passed in the Finance Act 2012. The legislation is now formally a new Part 8A of the Corporation Tax Act 2010 entitled "Profits Arising from the Exploitation of Patents etc". The Finance (No.2 Bill) 2015/16 includes proposed amendments, which, if implemented, will amend the patent box rules.
The Patent Box initiative is complementary to the R&D tax incentives which encourage companies to undertake their R&D in the UK
Overview
The Patent Box allows a 10% tax rate on profits derived from any products that incorporate patents. The net benefit for claiming companies is likely to be several percentage points of their corporate earnings, given that the main rate of UK corporation tax is 20 per cent.
The steady state cost, after the initial phasing- in period, of the Patent Box is forecast to be approximately £1.1 billion in terms of corporation tax revenues foregone by HM Treasury.
How it works
The claim process is as follows:
How to claim
Companies must calculate their qualifying Patent Box profit and then apply a specific formula in their tax computation to calculate the deduction in their tax liability. Then they can take the tax deduction as a benefit in their CT600 tax return. The formula to calculate the amount of the tax deduction is
where
Qualifying patents
Qualifying patents must have been granted by an approved patent-granting body, including the UK Intellectual Property Office, the European Patent Office, and designated European territories: Austria; Bulgaria; the Czech republic; Denmark; Estonia; Finland; Germany; Hungary; Poland; Portugal; Romania; Slovakia; and Sweden
Currently, the Patent Box excludes patents registered in territories such as the USA, France, and Spain because of differences in the search and approval process for patent applications.
The Patent Box excludes products that only have copyright or trademark protection.
Qualifying income
There are five categories (“heads”) of qualifying income:
Income generated from exclusive licenses will be qualifying income on both sides of the agreement – i.e. for the licensor and the licensee – subject to specific conditions concerning the meaning of exclusivity.
“IP-derived income”, where patented products or processes are used in the manufacture or delivery of non-patented products or services, will be qualifying income to the extent of a notional royalty which values the specific patented product or process as a proportion of the value of the non-patented product or service.
Qualifying company
Details in the legislation to look out for
Anti-avoidance
The following situations will be against the law:
Reasonable and commercially appropriate steps to restructure corporate arrangements to take advantage of the Patent Box will be considered legitimate.
Other technology tax reliefs
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) give generous income and capital gains tax relief to individuals who invest in small early stage businesses.
Government working group
The government established a working group to complement wider consultation on the Patent Box and to discuss options and proposals in more detail. Members of the Working Group include representatives from: HMRC and HM Treasury; industry (GlaxoSmithKline; Dyson; ARMSyngenta), the financial services community including large accounting firms (PWC; Deloitte; KPMG; Ernst and Young); independent consultants and representatives from the technology commercialisation sphere and professional bodies.
OECD Forum for Harmful Tax Practices and the EU Code of Conduct Group
The UK government is in the process of gathering evidence to submit to the Forum for Harmful Tax Practices (FHTP), part of the Organisation for Economic Co-operation and Development (OECD), in the forum's work on international base erosion and profit shifting, specifically Action Point 5 of the OECD Action Plan published in July 2013. The forum provides member countries with the opportunity to review each other’s tax arrangements and to challenge harmful tax initiatives.
Action 5 focuses on “substantial activity” that must occur in a jurisdiction for a company to benefit from a specific preferential tax regime.
The UK government publicly supports the current work around Action 5 to ensure a better understanding of what constitutes economic substance when businesses carry out R&D activities, so as to effectively address those instances where preferential tax regimes might present an opportunity to shift profits.
Options being discussed include a new method of calculating benefits for IP-incentive tax schemes. This is the so-called nexus approach (where underlying expenditure to create the IP is used to define the proportion of qualifying income generated from the IP), rather than the conventional transfer pricing approach (where transfer pricing principles define a substantial activity test and either the IP commercialisation activity passes the test or it does not, and all IP income thus either qualifies or it does not).
These discussions are also informed by work being carried out by the Economic and Financial Affairs Council (ECOFIN) and the EU Code of Conduct Group, which started in 2013 to look at the workings of the UK Patent Box scheme. The Code of Conduct Group operates on a similar basis to the FHTP. The Code of Conduct Group partnered with the FHTP in these discussions in early 2014.
Anglo-German accord on the UK Patent Box
Following a sustained period of international tax scrutiny led by Germany in the FHTP and the EU Code of Conduct Group, a compromise agreement for the UK patent box scheme based on a modified nexus approach was announced by the UK and Germany on 11 November 2014. The acceptance of a nexus based approach will have significant implications for the UK patent box scheme; fundamentally, patent box relief will now be restricted to profits generated from IP initially developed in the UK. The main points in the Anglo-German accord have been announced as follows:
The UK and Germany submitted their proposal to the OECD Forum on Harmful Tax Practices during its meeting on 17–19 November, and they have also committed to seek formal approval from the OECD and G20 at the January 2015 meeting of the OECD’s Committee on Fiscal Affairs.