Will nexus based patent boxes be internationally safe?

Open questions on the broader impact of the modified nexus approach

  • Author: Robert J. Danon
  • Category of article: Feature Articles
  • Field of Law: International fiscal law, Steuerpolitik
  • Reihe: 100-Jahre-ESTV
  • Citation: Robert J. Danon, Will nexus based patent boxes be internationally safe?, ASA 84 (2015/2016)
With respect to patent boxes, the BEPS project has resulted in a consensus – the modified nexus approach - designed to eradicate the harmful effects of these regimes. At the same time, however, the modified nexus approach also represents a decisive contribution to the substance pillar of the BEPS project, which is to reunite income with substantial activities. Moreover, from a tax policy perspective, the proportionate nature of the modified nexus approach will also make patent boxes more consistent and efficient in light of their objective to promote R&D. For these reasons, the author advocates that nexus based patent boxes should not only be authorized but also be automatically protected («safe») from the application of domestic anti-abuse rules or CFC legislation designed to pick up low taxed IP income. In particular, if States decide to give up fiscal revenues by operating a nexus based patent regime to stimulate economic growth through innovation, it is not acceptable that the benefit of such incentive be taxed away by other States. In the author’s opinion, this result should be the logical outcome of the BEPS project whose objective was precisely to favor coordination over unilateral measures.

Content

  • I. Introduction and issues at stake
  • 1. Tax policy issues raised by patent boxes before the BEPS era
  • 2. Patent boxes after the BEPS era
  • 2.1. The international awareness
  • 2.2. The consensus on the modified nexus approach
  • 2.3. Towards a more consistent and proportionate R&D tax policy
  • 3. Will nexus based patent boxes be internationally safe?
  • II. The modified nexus approach under BEPS action item 5
  • 1. Background
  • 2. General overview of the modified nexus approach
  • 3. Outsourcing of R&D functions and acquired IP
  • 4. Synthesis
  • III. Coordination with BEPS action item 3 (CFC rules)
  • IV. Coordination with BEPS action item 6 (treaty abuse)
  • V. Conclusions: will nexus based patent boxes be internationally safe?