The British government’s patent box which allows companies to cut their corporation tax to 10% constitutes harmful tax competition, according to the European Commission.
The tax break — which came into force in April — was introduced in last year’s budget and was to be phased in over five years with the express intention of increasing the amount of R&D undertaken in Britain. However it was also seen as a challenge to Ireland’s 12.5% corporation tax rate.
In its assessment the European Commission said the patent box breaches two provisions of the EU’s Code of Conduct on Harmful Business Taxation — that the patent development does not have to necessarily happen in Britain and produces no real economic advantage to the country; and that the lower rate of tax can be extended to cover more than just the patent.
The Commission also pointed out the complex formula used to calculate the tax break was not part of the routine system used and was not transparent.
Britain estimated that the tax break, once fully phased in from 2018, would cost the exchequer €898m a year. They said so far 35 groups had applied to use it, at a tax saving to them of €206m a year.
An EU source said the patent box allows companies to protect an important part of their tax base from the standard 23% corporate tax rate and pay a reduced 10% rate instead.
For instance if the key pad on a mobile phone was patented, the company could potentially claim the entire profits on the sale of the phone qualified for the lower tax rate and then, using the complex formula, decide which proportion of the profits were directly linked to the patented key pad. Various elements, including marketing, could be included in the lower rate.
According to Citigroup, GlaxoSmithkline will cut its rate of tax from 24% this year to 21% within four years. A similar ‘innovation box’ is also offered by the Netherlands, Belgium, Czech Republic, France, Hungary and Spain.
Germany has been especially upset by the UK move which they say has seen their share of patents cut and move to Britain, and the UK’s share increase from double digits to more than 2,000 in less than a year.
Ireland can also be expected to object when the Code of Conduct Group meets next Tuesday to review the Commission’s report on the British patent box. However, with the number of other countries with similar tax breaks, the member states represented on the group are not expected to take action, other than to recommend that Britain amend the scheme.
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