European challenge to UK Patent Box seemingly postponed, says expert, as ECOFIN orders 2014 review

Out-Law News | 13 Dec 2013 | 4:24 pm | 1 min. read

The European Commission's reported challenge to the UK's 'patent box' regime for the taxation of intellectual property (IP) appears to have been "kicked into the long grass", an expert has said, after it emerged that similar regimes will be reviewed as a whole.

National finance ministers that make up the EU's Economic and Financial Affairs Committee (ECOFIN) have ordered a review, to report back by the end of 2014, according to the draft minutes of a recent meeting (22-page / 229KB PDF). The review will be carried out by the EU's Code of Conduct Group, which oversees the trading bloc's 'Code of Conduct for Business Taxation', and is intended to ensure "consistency with the principle of equal treatment" between national incentives.

Tax expert Heather Self of Pinsent Masons, the law firm behind, welcomed the news.

"It would have been very unreasonable to single out the UK regime when other regimes have broadly similar effects, and have already been approved as not being harmful competition," she said. "Aligning the process with the OECD's wider work on base erosion and profit shifting (BEPS) makes much more sense."

Earlier this year, it emerged that the European Commission was considering a challenge against the UK over the incentive, following concerns that it broke its rules on harmful tax competition. The patent box regime, which came into force on 1 April 2013, allows companies liable to UK tax to elect to have profits earned from their patented innovations, and certain other IP rights, taxed at a lower level of corporation tax.

The EU's Code of Conduct for Business Taxation (6-page / 370KB PDF) was set out in 1997 and was designed to detect "harmful" tax measures introduced by member states that could encourage businesses to locate in that member state at the expense of others. It requires member states to refrain from introducing any new harmful tax measures and to amend any existing laws and practices that are deemed to be harmful in respect of the principles of the Code.

The Code is overseen by a Code of Conduct Group, and although it is not a legally binding instrument any breaches would most likely be escalated to ECOFIN. According to the minutes of ECOFIN's recent meeting, the Group will review national patent box regimes on its behalf.

This week, it emerged that pharmaceuticals giant GlaxoSmithKline (GSK) has invested a further £200 million in advanced manufacturing in the UK since the patent box regime was introduced. GSK had previously been involved in lobbying the Government to introduce such a scheme to encourage investment in research and development and innovation.

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