Tax incentives on Research and Development UK Branch Report – overview summary and key questions

1. Tax incentives on Research and DevelopmentUK Branch Report – overview summary and key questions

2. Agenda for tonight • - details of the relief • - international context • 1. Patent box • - details of the relief • - international context • 2. R&D • Q&A

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

4. 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.

5. 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

6. Overview of the Patent Box regime 10% effective tax rate

7. Overview of the Patent Box regimeBasics of the relief Phased in from 1 April 2013 Worldwide income from qualifying IP rights If elect out may not re-join for five years Elect in within two years from end of AP Shelf life of patents typically 20 years

8. Patent Box – phasing in of benefits 10% corporation tax rate will be phased in over first five years:

9. 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.

10. Patent Box - what is qualifying income • Patents embedded in products. • Licensedpatents. • Sale of patents. • Patent infringement. • Patented processes. • Patents exploited in providing services.

11. Qualifying conditions for patents

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

13. Patent Box Computing the relevant intellectual property (IP) profit (RIPI) Final patent box profits Step 1 qualifying profits Step 1 profit attributed to non-qualifying income 10% Your taxable profits qualifying patent box income total income x taxable profits 21% Step 3 remove marketing return 21% Step 2 remove routine return 21% 10% x expenses

14. 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

15. Acquired IP Patent box company • undertakes qualifying development • buys IP • qualifies for PB after acquisition.

16. Acquired IP Existing company • buys new company/group containing qualifying IP • group are entitled to PB • SO LONG ASqualifying development continues for 12 months. New acquisition containing qualifying IP

17. 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.

18. 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

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

20. 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.

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

22. 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.

23. 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 |

24. Key features of the UK patent box

25. Keyfeatures of French patent box

26. Key features of The Netherlands Innovation box

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

28. 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

29. 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.

30. 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.

31. My contact details Katy Rabindrankaty.j.rabindran@uk.gt.com 01865 799846