The UK government has confirmed that the patent box relief per se will be withdrawn by June 2021, however, it is working with G20 countries to come up with alternative reliefs for R&D, in the form of corporate tax incentives for innovation.

To allow time for the legislative process, all existing intellectual property (IP) regimes will be closed to new entrants (products and patents) in June 2016. These schemes will be abolished by June 2021.

The bilateral talks also included a joint proposal to advance negotiations on new rules for preferential intellectual property (IP) regimes within the G20/OECD Base Erosion and Profit Shifting (BEPS) project.

Work in relation to BEPS Action 5, Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance has led to the development of proposals for new rules, known as the ‘modified nexus approach, based on the location of the R&D expenditure incurred in developing the patent or product. This approach requires tax benefits to be connected directly to R&D expenditures.

The joint proposal between the UK and Germany aims to address concerns expressed by some countries about some features of the proposed ‘nexus’ approach, and identify what further work is required to ensure agreement is reached on this issue during 2015.

These concerns include the calculation of qualifying R&D expenditure, transitional arrangements between regimes and time allowed for this through grandfathering provisions, and tracking qualifying R&D expenditure.

The preferred Anglo-German approach would be to ensure substantial activity is undertaken in the jurisdiction offering the relief, while better reflecting the commercial realities of R&D investment by business.

Tax advisers warn that any vote by the G20 could curtail the benefits of these tax reliefs.

BDO tax partner Richard Rose said: 'The taxation benefits from the UK’s patent box regime are likely to be curtailed if a compromise proposal by the UK and Germany, that is to be put before the G20 and OECD, is adopted.

'The compromise may lead to the end of the UK’s current patent box regime but with an option for UK businesses to grandfather intellectual property already in the existing regime.'

The agreement also sets provisions for transitional arrangements between existing and new rules, and proposes further work to develop practical means of implementing the new approach to IP rules to help crack down on perceived tax avoidance by big business.

Germany and the UK will submit this proposal to the OECD forum on harmful tax practices, which will be held during the G20 meeting on 17-19 November in Brisbane.

Bill Dodwell, head of tax policy at Deloitte, welcomed the decision to retain R&D corporate tax incentives. He said: ‘The agreement will need to be endorsed by other members of the G20 and OECD before it can be adopted. It also seems that detailed rules on tracking and tracing research and development costs will need to be agreed, as well as details on how existing regimes are moved into the new approach. 

‘Focusing tax incentives on patents and equivalents may mean the withdrawal of some of the wider intangibles regimes adopted by other countries.’

Chancellor George Osborne said: ‘Our joint proposal balances the need to allow countries that wish to have these [IP] regimes to do so, whilst ensuring that they operate by rules that prevent abuse.’

‘Patent Boxes have always been about incentivising the commercialisation of innovation, whereas R&D expenditure credits support the initial R&D,’ stressed Dodwell. ‘The UK has a good research record but a less strong commercialisation record – so we are pleased that this support can continue.’

Despite EU talk of testing UK patent box rules in the European Court of Justice following criticism by EU members that the relief amounts to state aid, German finance minister Wolfgang Schäuble said: ‘We have reached an important agreement on patent boxes. Preferential tax treatment of intellectual property must be dependent on substantial economic activity.

‘More and more countries are speaking out against allowing too much leeway for large multinationals to minimise their taxes. Just because something is legal, does not mean it is fair in tax terms. Multinationals must contribute their fair share to public budgets – just like any other company has to.’

Ben Jones, tax partner at law firm Eversheds, said that this proposed change to the patent box regime is not surprising in the current tax climate, with national measures designed to increase tax competition and attract business under intense scrutiny.

'The UK patent box was introduced as part of a package of measures specifically targeted at making the UK a more competitive business environment from a tax perspective and, in part, in response to similar successful incentives in other jurisdictions such as the Netherlands and Luxembourg.

The proposed change will reduce the scope of the UK patent box, and consequently the attractiveness of the UK as a jurisdiction in which to base certain types of businesses. It is however a good example of the UK putting its money where its mouth is regarding the international movement to reform corporate taxation.

'The key question will be whether competing tax incentives in other countries will be similarly curtailed such that the UK is not ultimately disadvantaged by this change,' said Jones.

The joint statement by Germany and the UK is available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/373135/GERMANY_UK_STATEMENT.pdf