Belgium has updated it’s innovation box to comply with the BEPS Action 5 recommendations; the changes are retrospective to July 2016, although claimants who were under the old rules continue to be grandfathered into those rules until the end of June 2021 (pretty much as every other country making changes has done).
Qualifying income for the innovation income deduction (as it’s technically called) include:
- embedded income – from the sale of products or services covered by qualifying IP, or made by IP-protected processes;
- licensing income;
- infringement income; and
- the gain on sale of relevant IP
Qualifying IP rights:
- Supplementary Protection Certificates (SPCs);
- Plant variety rights (from 1 July 2016);
- Orphan drugs (from 1 July 2016, limited to ten years);
- Data or market exclusivity granted by a public body (from 1 July 2016); and
- Software copyright (from 1 July 2016).
The profits from qualifying income relating to qualifying IP rights are then subject to a nexus fraction, as recommended in Action 5, and the amount resulting from the calculation will be eligible for an 85% deduction on net innovation income (the old regime allowed an 80% deduction).
The Ukraine has introduced a restriction on deduction of royalties – a payment of royalties to a non-resident entity, even if it is an unconnected party at arm’s length, will be non-deductible if:
- the recipient is not the beneficial owner of the royalties;
- the IP rights to which the royalty relates have a Ukrainian origin; or
- the royalties are not subject to tax in the recipient’s country of residence.
Before the changes, the payer could deduct the royalty payment if they could show the payment was at arm’s length.
Just a heads up that the fourth edition of Taxation of Intellectual Property is now available from Bloomsbury Publishing – I will be adding updates here as they arise, cross-referenced to the book (inevitably, ‘stuff’ has changed in IP tax in the fairly short time since the proofs were done!).
I’ve spotted some snafus with updating (changes not coming through in some paragraphs) and will also add corrections for those; they seem mostly to be towards the back of the book in the less technical chapters. I suspect some incompatibility between my systems and those of the publishers, unfortunately.
From today’s draft Finance Bill overview:
“2.13. Patent Box: cost sharing for collaborative Research and Development (R&D)
As announced at Autumn Statement 2016, the government will legislate in Finance Bill 2017 to add specific provisions to the revised Patent Box rules introduced in Finance Act 2016, covering the case where R&D is undertaken collaboratively by 2 or more companies under a ‘cost sharing arrangement’ (CSA). The provisions will ensure that companies are neither penalised nor able to gain an advantage under these rules by organising their R&D in this way.
The new rules provide that:
- where a company acquires an interest in or increases its interest in a CSA, an appropriate amount of the consideration paid counts as acquisition cost for the purpose of calculating the R&D fraction, to the extent any Intellectual Property (IP) assets are held within the CSA
- where a company disposes of an interest or reduces its interest in a CSA, an appropriate amount of any consideration received is treated as IP income, to the extent any IP assets are held within the CSA
- activity of participants in the CSA to develop IP or products is appropriately treated in the company’s R&D fraction
This has effect for accounting periods commencing on or after 1 April 2017. Draft legislation (provision 24) and a TIIN has been published on 5 December.”
This should be filed under “not particularly surprising”, it’s been a gap in the legislation/guidance for some time.
The devil will no doubt follow in the Finance Bill detail, but the heads up on IP tax points from the Chancellor’s statement today (23 November, 2016) is:
IP fiscal stuff:
- the new (post-1 July 2016) patent box rules are to be updated by adding provisions to deal with cost sharing arrangements so that companies using these are not advantaged/disadvantaged when it comes to calculating the R&D fraction
- ‘new spending’ of £4.7 billion between 2017 and 2021 to enhance the UK’s position as a world leader in science and innovation (whatever that means …), apparently to be rolled out as £425m in 2017-18, £820m in 2018-19, £1.5bn in 2019-2020, and £2bn in 2020-2021. This is apparently direct funding (grants) into an Industry Strategy Challenge Fund, to be modelled on the USA’s Defense Advanced Research Projects Agency programme, as well as allocating funding more generally.
- £0.7 billion to support the market to roll out full-fibre connections and future 5G communications
IP non-immediately-fiscal stuff:
- review tax environment for R&D to build on the R&D Expenditure Credit for large companies ‘to make the UK an even more competitive place to do R&D’
- more Science & Innovation Audits
HMRC have recently released statistics for take up of the patent box in 2013-14 (the first year of the relief); on the same day, they released the latest statistics on use of the UK’s R&D tax reliefs for the same tax year. They make for some interesting compare and contrast points:
Total claims in 2013-14
– patent box: 700
– R&D tax reliefs: 22,415
Total value of claims in 2013-14
– patent box: £342.9m
– R&D reliefs: £2.45bn
SME claims in 2013-14
– patent box: 475 (68%)
– R&D reliefs: 19,990 (95%)
Value of SME claims in 2013-14
– patent box: £15.7m (5%)
– R&D reliefs: £1.165bn (48%)
The largest claimant sector (for both patent box and R&D) is, unsurprisingly, manufacturing (63% of patent box claims; 30% of R&D claims). The second largest for R&D is Professional, Scientific & Technical, with about 20% of claims – but this sector only made 6.3% of patent box claims. This might relate to the nature of the patent box, and particularly the extra hurdle for claiming on services income. The other sectors are somewhat more difficult to analyse as numbers of patent box claims are so low that sectors have been combined to prevent commercial information being disclosed.
The R&D relief requires a company to be undertaking a project which seeks an advance in the global state of knowledge in an area of science or technology, it would seem logical that a successful R&D-relief qualifying project would often lead to something capable of being patented – and, in the 14 years for which we have R&D statistics, 141,000 claims for relief have been made. Fair enough, R&D relief claims can be made for unsuccessful projects, but out of 141,000 R&D relief claims, it seems pretty likely that there are more than 700 companies within the scope of the patent box … the report doesn’t speculate upon why the take up is so low in terms of numbers (and for comparison, the impact note when the patent box was introduced estimated the first year cost to the Treasury at £500m).
WebMindLicenses Kft. v Nemzeti Adó- és Vámhivatal Kiemelt Adó- és Vám Főigazgatóság (Case C–419/14)
The ECJ decision on the WebMindLicenses case (published 17 Dec 2015) provides guidance on points to consider when determining whether a licensing agreement amounts to VAT ‘abuse’ (and, accordingly, points to watch to make sure a licensing agreement is not abusive!)
The UK announced on Thursday (22nd October) its (rather long awaited) proposals to update the patent box to make it compliant with the OECD BEPS proposals on amendments to patent/knowledge boxes. The UK proposals set out a series of questions for consultation, with draft legislation to come in December.
tl;dr version: it’s more generous that it might have been on grandfathering, but companies had better get their accounting software ready to do some serious work in order to keep track once into the new regime. The added complexities that will be added may well put off companies from claiming.
There are no proposals to include software copyright as qualifying IP, although the BEPS project does permit this – and the Irish knowledge box draft rules, published on the same day, do include software (and the Irish knowledge box offers a 6.25% effective rate. Just in case you wondered).
It’s been talked about for years, but finally there’s something to look at – members of the House Ways & Means Committee have produced a draft bill for an ‘innovation box’ for the USA (http://waysandmeans.house.gov/wp-content/uploads/2015/07/Innovation-Box-2015-Bill-Text.pdf).
Summer Budget 2015 – summary of the IP angles
The Summer Budget took a few sideswipes at IP tax in passing – the biggest issue being likely to be the removal of amortisation for acquired goodwill (and so any unregistered IP included therein, probably) and customer-related intangible assets. There were some good points as well, although those were mostly in the realm of general improvements in the corporate tax field.
The one thing not mentioned is the patent box – which, following the OECD BEPS announcements earlier this year and the UK/German agreement last year, is supposed to be amended/updated by legislation in 2015. Presumably it’s been put off to the Autumn Statement and the draft 2016 Finance Bill …