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© 2014 Grant Thornton UK LLP. All rights reserved.
Tax incentives on Research and Development
UK Branch Report – overview summary and key questions
© 2014 Grant Thornton UK LLP. All rights reserved.
Agenda for tonight
1. Patent box
- details of the relief
- international context
2. R&D- details of the relief
- international context
Q&A
© 2014 Grant Thornton UK LLP. All rights reserved.
PATENT BOX Part 1: R&D incentives under domestic law
© 2014 Grant Thornton UK LLP. All rights reserved.
Introduction of patent box
The introduction of Patent Box is part of the Government's aim to make the UK the most competitive tax system in the G20, and is a key part of ensuring the UK is a competitive tax regime for innovative high-tech companies.
© 2014 Grant Thornton UK LLP. All rights reserved.
Suggest impact of patent box regimes, including the UK regime
FROM: Corporate Taxes and Intellectual Property: Simulating the Effect of Patent Boxes by Rachel Griffith, Helen Miller, and Martin O’Connell
© 2014 Grant Thornton UK LLP. All rights reserved.
Overview of the Patent Box regime
10% effective tax rate
© 2014 Grant Thornton UK LLP. All rights reserved.
Overview of the Patent Box regimeBasics of the relief
Phased in from 1 April 2013
Worldwide income from qualifying IP
rights
Shelf life of patents
typically 20 years
Elect in within two years from
end of AP
If elect out may not re-join for
five years
© 2014 Grant Thornton UK LLP. All rights reserved.
Patent Box – phasing in of benefits
10% corporation tax rate will be phased in over first five years:
Tax year 2013/14 2014/15 2015/16 2016/17 2017/18
Proportion of full benefit available
60% 70% 80% 90% 100%
© 2014 Grant Thornton UK LLP. All rights reserved.
Qualifying IP rights
Patents granted by the UK Intellectual Property Office.
Patents granted under the European Patent Convention.
Patents granted by certain prescribed EEA states.
Supplementary protection certificates.
Plant Breeders' rights.
Community plant variety rights.
Exclusive licences.
© 2014 Grant Thornton UK LLP. All rights reserved.
Patent Box - what is qualifying income
Patents embedded in products.
Licensed patents.
Sale of patents.
Patent infringement.
Patented processes.
Patents exploited in providing services.
© 2014 Grant Thornton UK LLP. All rights reserved.
Qualifying conditions for patents
Criteria Requirement
Registration and ownership
• Legal ownership or exclusive licence
Development • Has carried out significant activity to develop the invention or its application
Active management Company Group
No specific requirement Must carry on a significant amount of management activity in relation to all its qualifying IP
© 2014 Grant Thornton UK LLP. All rights reserved.
Satisfying the development condition
Qualifying development includes:• the creation of the invention, • further developing the invention, or• item or process which incorporates the invention.
© 2014 Grant Thornton UK LLP. All rights reserved.
Patent Box Computing the relevant intellectual property (IP) profit (RIPI)
Your taxable profits
Step 1 profit attributed to non-qualifying income
qualifying patent box income total income
x taxable profits
Step 1 qualifying profits
21%
21%Step 2 remove routine return 10% x expenses
Step 3 remove marketing return21%
10%
Final patent box profits
© 2014 Grant Thornton UK LLP. All rights reserved.
3 Marketing asset return
Deduct 'marketing assets return'
• Equivalent notional marketing royalty
• If NMR > actual marketing royalty then deduct the difference
• No deduction required if the difference
is less than 10%.
Small claims treatment
Available where profits are not more than £3m.
Then deduct 25% of profit, and if remaining profits are more than £1m, reduce to £1m.
OR
© 2014 Grant Thornton UK LLP. All rights reserved.
Acquired IP
Patent box company
• undertakes qualifying development
• buys IP• qualifies for PB after
acquisition.
© 2014 Grant Thornton UK LLP. All rights reserved.
Acquired IP
Existing company
• buys new company/group containing qualifying IP
• group are entitled to PB• SO LONG AS
qualifying development continues for 12 months.
New acquisition containing
qualifying IP
© 2014 Grant Thornton UK LLP. All rights reserved.
Specific anti-avoidance
In addition to the UK general anti-avoidance legislation, the patent box has specifically targeted:• licences conferring exclusive rights• incorporation of qualifying items• tax advantage schemes.
© 2014 Grant Thornton UK LLP. All rights reserved.
When to elect in?
• Model the tax savings achieved from patent box.
• Look at the long term position of the company.• Consider planning which will maximise your
claims
© 2014 Grant Thornton UK LLP. All rights reserved.
PATENT BOXPart 2: R&D incentives in an international context
© 2014 Grant Thornton UK LLP. All rights reserved.
Taxation of permanent establishments
UK Patent box is applicable to both UK companies and permanent establishments.
In the UK, withholding tax on royalty payments should not impact on the availability of patent box.
© 2014 Grant Thornton UK LLP. All rights reserved.
Overseas expenses
Again, there is no discrimination in the UK between Patent box costs incurred here and overseas.
© 2014 Grant Thornton UK LLP. All rights reserved.
Application of patent box to state aid
To satisfy state aid requirements provided that:"they apply without distinction to all firms and to the production of all goods"
However:• both reliefs apply only to corporate entities• only patentable technologies can qualify for patent
box.
© 2014 Grant Thornton UK LLP. All rights reserved.
International patent box incentives
Belgium | Brazil |France | Hungary | Netherlands | Spain | United Kingdom |
Several countries have adopted patent/innovation box regimes
The detail of different regimes shows different ways to try to incentivise innovation
© 2014 Grant Thornton UK LLP. All rights reserved.
Key features of the UK patent box
Effective rate of corporation tax
10%
Qualifying income Profits from qualifying IP, adjusted for:- routine return- value of marketing assets
Qualifying IP types Patents and some other
Applicable to existing IP?
Yes
© 2014 Grant Thornton UK LLP. All rights reserved.
Key features of French patent box
Effective rate of corporation tax
15% (main rate 33.33%)
Qualifying income Royalties net of cost of IP management
Qualifying IP types Patents, patentable inventions and industrial fabrication processes
Applicable to existing IP?
Yes
© 2014 Grant Thornton UK LLP. All rights reserved.
Key features of The Netherlands Innovation box
Effective rate of corporation tax
5% (main rate 25%)
Qualifying income Net income from qualifying IP
Qualifying IP types Patents and IP derived from technological R&D activities
Applicable to existing IP?
Only IP generated after 1 December 2006
© 2014 Grant Thornton UK LLP. All rights reserved.
Consideration of harmful tax competition
Patent box provides relief equating to a 50% cut in the main rate of corporation tax.
© 2014 Grant Thornton UK LLP. All rights reserved.
Consideration of harmful tax competition
Patent box provides relief equating to a 50% cut in the main rate of corporation tax.
1
Advantages only accorded to non-
residents X
2
Advantages ring-fenced from
domestic market X
3
Advantages granted without real economic
activity/substantial economic presence?
4
Rules for profit determination
followed OECD principles?
5
Tax measures lack transparency
X
© 2014 Grant Thornton UK LLP. All rights reserved.
How could the Patent Box be impacted by EU review?
Advantages granted without real economic activity/substantial economic presence?• could see a strengthening of the rules for 'active ownership' of
patents.
Rules for profit determination followed OECD principles?• depends on whether applicable to inter-company transactions
only• otherwise could see OECD rules used throughout the
calculation.
© 2014 Grant Thornton UK LLP. All rights reserved.
Transfer of intangible assets abroad
Classified as a disposal and subject to corporation tax.
However, has previously been 'known' tax planning, and the patent box was partly introduced to prevent this.
© 2014 Grant Thornton UK LLP. All rights reserved.
My contact details
Katy Rabindrankaty.j.rabindran@uk.gt.com01865 799846
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