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
2. R&D
- details of the relief
- international context
- 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 regime
Basics of the relief
Phased in from
1 April 2013
If elect out may
not re-join for
five years
Elect in within
two years from
end of AP
© 2014 Grant Thornton UK LLP. All rights reserved.
Worldwide
income from
qualifying IP
rights
Shelf life of
patents
typically 20
years
Patent Box – phasing in of benefits
10% corporation tax rate will be phased in over first five years:
Tax year
Proportion of full
benefit available
2013/14
2014/15
2015/16
2016/17
2017/18
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
•
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.
Legal ownership or exclusive licence
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)
Step 1 profit
attributed to nonqualifying income
21%
Your10%
taxable
profits
Final
box
Step 1patent
qualifying
profits
profits
qualifying patent box income
total income
x taxable profits
21%
Step 3 remove
marketing return
21%
Step 2 remove
routine return
10% x expenses
© 2014 Grant Thornton UK LLP. All rights reserved.
3 Marketing asset return
Deduct 'marketing assets return'
Small claims treatment
• Equivalent notional marketing royalty
Available where profits are not more
than £3m.
Then deduct 25% of profit, and if
remaining profits are more than £1m,
reduce to £1m.
© 2014 Grant Thornton UK LLP. All rights reserved.
• If NMR > actual marketing royalty then
deduct the difference
OR
• No deduction required if the difference
is less than 10%.
Acquired IP
Patent box
company
© 2014 Grant Thornton UK LLP. All rights reserved.
• undertakes qualifying
development
• buys IP
• qualifies for PB after
acquisition.
Acquired IP
Existing
company
New acquisition
containing
qualifying IP
© 2014 Grant Thornton UK LLP. All rights reserved.
• buys new company/group
containing qualifying IP
• group are entitled to PB
• SO LONG AS
qualifying development
continues for 12 months.
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 BOX
Part 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
Several countries have adopted patent/innovation box
regimes
The detail of different regimes shows different ways to try
to incentivise innovation
Belgium | Brazil |France | Hungary |
Netherlands | Spain | United Kingdom |
© 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 nonresidents X
2
3
Advantages ringAdvantages
fenced from
granted without
domestic market
real economic
X
activity/substantial
economic
presence?
© 2014 Grant Thornton UK LLP. All rights reserved.
4
Rules for profit
determination
followed OECD
principles?
5
Tax measures
lack transparency
X
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 Rabindran
katy.j.rabindran@uk.gt.com
01865 799846
© 2014 Grant Thornton UK LLP. All rights reserved.