German Finance Minister Wolfgang Schaeuble said on Tuesday that such tax breaks for patents (the UK regime allows for a reduced 10% tax rate for income derived from UK or European patents held in the UK, for instance) do not respect the spirit of EU anti-discriminatory rules.
After statistics revealed the extent of the migration of patent registrations from Germany to the UK (according to the UK Patent Office 2012 saw the UK attract 27% more German patents to the UK than the previous year) in anticipation of the new UK regime entering into force on January 1 2013, Schaeuble called for the withdrawal of the scheme, and others like it elsewhere in Europe.
The concern was initially raised at a meeting of state tax ministers in May. After that meeting, German officials told International Tax Review that the country has not ruled out introducing its own version of the regime, though it is not likely to be introduced anytime soon.
“At the moment, the Federal Ministry of Finance does not consider the introduction of patent box regimes in Germany,” said a spokesman for the German Federal Ministry of Finance, though he conceded “the possible effects of patent box regimes are still in discussion”.
But it now appears Germany is more likely to try and challenge existing regimes, rather than introduce its own.
“I suppose what will be looked at is whether such regimes are creating harmful competition,” said Ian Prideaux, partner at PwC.
Prideaux said that while it is not surprising that Germany is trying to battle this, he is not convinced Schaeuble will be successful in forcing the removal of the schemes.
“I don’t think it’s really a surprise that Germany is objecting, and I don’t think the UK government will be surprised either,” said Prideaux. “But we are not planning or advising clients with repeal of the measure in mind. I don’t think it will be removed.”
Schaeuble wants EU finance ministers to conduct a review of the impact of innovation incentives on attracting corporate investment.
Philip Kermode, Director, Directorate-General for Taxation and Customs Union of the European Commission, says the patent box is “clearly a major issue”.
“Within the context of the discussions we have had in the code of conduct group over the previous years, the idea has always been that tax regimes would be harmful if they were effectively ring-fenced and attracting foreign income,” he said, adding there were also conditions based around substance.
“But the essence of it was that you couldn’t run a special low tax regime to entice on business,” he added. “Now in practice, that has meant that any member state that wants to apply a relatively low tax regime, has to apply it to everyone. They cannot just pick and choose.”
Kermode suggested the issue should be resolved in the EU’s code of conduct group.
The removal of the UK patent box would be a blow for the UK government’s Open for Business agenda, and would not be welcomed by taxpayers, either.
“It has been really well-received by taxpayers. There is a view that it is quite complex, but there is certainly huge interest in the patent box,” said Prideaux.
Richard Asquith, head of tax at TMF Group, agrees.
“The UK’s patent box scheme has been a big hit,” he said. “It is not the best scheme in Europe, but combined with the rapidly falling UK corporation tax rate, due to drop to 20% by 2015, it makes the UK very much the front-runner for European hi-tech investment.”
