© 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.

Tax incentives on Research and Development

UK Branch Report – overview summary and key questions


Agenda for tonight

1. Patent box

- details of the relief

- international context

2. R&D- details of the relief

- international context

Q&A


PATENT BOX Part 1: R&D incentives under domestic law


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.


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


Overview of the Patent Box regime

10% effective tax rate


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


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%


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.


Patent Box - what is qualifying income

Patents embedded in products.

Licensed patents.

Sale of patents.

Patent infringement.

Patented processes.

Patents exploited in providing services.


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


Satisfying the development condition

Qualifying development includes:• the creation of the invention, • further developing the invention, or• item or process which incorporates the invention.


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


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


Acquired IP

Patent box company

• undertakes qualifying development

• buys IP• qualifies for PB after

acquisition.


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


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.


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


PATENT BOXPart 2: R&D incentives in an international context


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.


Overseas expenses

Again, there is no discrimination in the UK between Patent box costs incurred here and overseas.


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.


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


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


Key features of French patent box


15% (main rate 33.33%)

Qualifying income Royalties net of cost of IP management

Qualifying IP types Patents, patentable inventions and industrial fabrication processes


Yes


Key features of The Netherlands Innovation box


5% (main rate 25%)

Qualifying income Net income from qualifying IP

Qualifying IP types Patents and IP derived from technological R&D activities


Only IP generated after 1 December 2006


Consideration of harmful tax competition

Patent box provides relief equating to a 50% cut in the main rate of corporation tax.


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


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.


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.


My contact details

Katy [email protected] 799846

© 2014 Grant Thornton UK LLP. All rights reserved. Tax incentives on Research and Development UK Branch Report – overview summary and key questions.

Documents

grant thornton uk llp

uk regime

patent box details

patent box regimebasics

patent infringement

impact of patent box

plant breeders rights

effect of patent boxes