Key features of the final report
1. Review of preferential regimes
The OECD Forum on Harmful Tax Practices (FHTP) will continue its work in reviewing preferential regimes (currently 43 regimes identified of which 16 IP regimes, within the context of a substantial activity requirement).
2. Requiring substantial activity for IP regimes:
For IP regimes the report agrees on the so-called ‘nexus’ approach which seeks to directly link IP regime benefits to the claimant company’s contribution to the development of the IP in question, measured by reference to the related R&D expenditure as a proportion of total R&D expenditure, with expenditure acting as a proxy for activity. The proposal is based on applying the following formula in determining regime benefits:
Qualifying expenditure must be directly connected to the IP asset and will in principle not include interest payments, building costs, acquisition costs and related party outsourcing. A 30% ‘up-lift’ for qualifying expenditure is allowed to the extent that the taxpayer has non-qualifying expenditures.
Qualifying IP includes (i) patents and (ii) IP assets that are functionally equivalent to patents if those IP assets are both legally protected and subject to similar approval and registration processes. Under (ii) the report refers to (a) patents defined broadly, (b) copyrighted software and (c) certain IP assets that are non-obvious, useful and novel. The IP assets under (c) need to be certified as such by a competent government agency and can only qualify in case the taxpayer has no more than € 50 million in global group-wide turnover and does not earn more than € 7.5 million per year in gross revenue from all IP assets.
Eligible IP income includes income that is derived from the IP asset and this may include royalties, capital gains and other income from the sale of an IP asset and embedded IP income from the sale of products and the use of processes directly related to the IP asset.
As a transitional arrangement, the report concludes that no new entrants will be permitted in any existing IP regime not consistent with the nexus approach after 30 June 2016. Countries are permitted to allow taxpayers benefiting from an existing IP regime to keep such entitlement until 30 June 2021 at the latest.
3. Improving transparency: compulsory spontaneous exchange of information on rulings and APAs
The report notes that a framework covering all rulings has been agreed. The framework builds on earlier OECD guidance, taking into account the Convention of Mutual Assistance in Tax Matters and the European Union’s Council Directive on Administrative Cooperation in the field of taxation (2011/16/EU). The framework covers all taxpayer specific rulings, advance tax rulings, advance pricing agreements and general rulings.
For countries which have the necessary legal basis, exchange of information will take place from 1 April 2016 for future rulings. For past rulings, the report confirms that rulings that have been issued on or after 1 January 2010 and were still in effect as from 1 January 2014 must be exchanged. The exchange of past rulings will need to be completed by 31 December 2016.
Impact of Action 5 for the Netherlands
The Netherlands has already announced to propose incorporation of the nexus approach in the Dutch Innovation box regime by September 2016. The intended date of entry into force will be 1 January 2017. Also the EU is expected to endorse the final OECD approach and will monitor the implementation by EU Member States in 2016. Our expectation is that WBSO certificates, under certain circumstances, will remain an entree ticket for medium and small size enterprises.
Compulsory spontaneous exchange information on rulings
For the Netherlands, the proposal to amend Directive 2011/16/EU as regards the mandatory automatic exchange of information on cross- border ATR’s and APA’s within the EU is currently the most relevant legal base at this point in time. Agreement on the final text of the EU proposal is expected shortly. The entry into force of the EU mandatory automatic exchange of cross border ATR’s and APA’s is expected at 1 January 2017 for all valid rulings and APAs issued, amended or renewed from 1 January 2012 onwards.