Tax Analysts reports this morning (behind a paywall) that:
In a report prepared ahead of the October 22 meeting of the Code of Conduct Group on Business Taxation, the European Commission has determined that the patent box regime enacted by the U.K. government violates two of the five criteria for evaluating special tax regimes.
A commission spokesperson on October 17 told Tax Analysts that the U.K. patent box regime was examined at the behest of unnamed member states. The spokesperson cautioned against drawing larger conclusions from the report 2013 WTD 203-20: Other Administrative Documents beyond the compatibility of the U.K. regime with the code of conduct.
Now I have to say that the patent box was a Labour idea. It was a bad idea. It was designed to assist a few companies. That's always a mistake when it comes to tax law. And what it does is allow the income from new patents registered in the UK to be subject to a special, low rate of corporation tax of 10%.
I am delighted that the EU have decided to look at this now it is in operation to see if it violates an old friend of this blog, the EU Code of Conduct on Business Taxation, which dates from 1997. That code may be 'soft law' i.e. it amounts to pressure on states rather than firm legal requirement, but it has always worked to date.
I suspect the EU is right on this issue: this is an abusive tax measure intended to relocate business without consideration for the economic substance of what is actually happening in the underlying activity and if so then it is abusive.
It would be good if they considered Osborne's controlled foreign company rules in the same light, but it may be harder.
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Given that this is the next area of offshoring after finance (there are already firms doing offshore IP in Jersey), the EU needs to take a good look at who else is using this sort of tactic.
So,
patent box violates EU law – good
FTT violates EU law – bad
FTT does not violate EU law
Well the EU Council Legal Service disagrees, they think it does violate EU law and they would have a more experienced view on these matters than you….
http://www.taxanalysts.com/www/features.nsf/Articles/4C0D73B2B701E2C485257BE8005C61C6?OpenDocument
And other parts of the EU strongly disagree – as I know
So…
Some laws are good!
… & some are bad!
Its not really a new concept!
Fear of the tax havens underpins the introduction of the Patent Box rules. All part of the race to the bottom. Sickening really and I’m glad the EU are looking at the rules.
The report was prepared for the meeting of the working party that is meeting tomorrow (22 October) and that working party will decide whether the EC Commission’s view merits further investigation of the regime and if so they will recommend to ECOFIN, the meeting of Ministers being held in December, that they find the regime breaches the code.
So at this point in time it is not conclusively determined that the UK regime breaches the code, it is just a review carried out by the EU Commission has suggested it does. It is also interesting that a few commentaries suggest it is Germany that has pushed for this — they have lost out to the UK it seems as some R&D activity has been relocated from there to here (allegedly).
It is clear that the UK government will defend its position, and bearing in mind there are a number of similar regimes around Europe it will no doubt get support from them, since they won’t want their regimes to be discontinued either.
I have mentioned before that in my view this is not a well targeted incentive so it will be interesting to see how this pans out. There’s a good take on it and links at IFS: http://www.ifs.org.uk/publications/6899, and their paper saying why patent box is ‘not justified’ (see page 9 of PDF — it says 231 at the bottom) at: http://www.ifs.org.uk/budgets/gb2011/11chap10.pdf, which has further links to more papers setting out their view of the patent box.
Verth has a point – Several other EU countries, including the Netherlands, Luxembourg, Belgium, Spain and Cyprus, have similar systems; but so far only the Cypriot and UK schemes have been openly challenged. The working group will need unanimity if the UK is to be forced to change its regime, and there are many players who would be happy to see such measures remain unchallenged.
Not true
Some may be compliant
I think others were looked at and vetted, but that does not mean that they should not be revisted and if ECOFIN finds againts the UK, one would expect that to trigger a wider review of patent box schemes.
And it seems the report to the working party on teh UK was not intended for public use, so leaking the report on the UK is presumably a political move. On the basis that these are not normally publicised I am guessing we do not know what schemes have and have not already been vetted.
And as Richard says, some may be compliant and some may not be, so in light of a wider review other existing schemes could well be found to be non compliant.
And a final thought … up until recently it has mostly been the smaller countries that had patent boxes. So politically no one has been too bothered. I think the issue now is that some of the bigger countries have followed and the UK is quite a generous scheme so perhaps a good one to challenge in the first instance and p[otentially prompt that wider review. I suspect the suggestion that Germany is behind this is not too far fetched.
All fair comment
Hello
Does anyone know how yesterday’s Code of Conduct meeting went? Is the issue to go to ECOFIN.
It feels like a full debate is required, which I am sure was the objective of the Germans when they encouraged the EC review.
Thanks