The UK’s “Patent Box” – nasty, disingenuous and hypocritical tax law

On September 26th David Quentin, a TJN Senior Adviser, wrote a blog entitled The UK’s “Patent Box” – a really nasty, disingenuous and hypocritical piece of tax law. Now an article based on this, co-authored by TJN writer Nicholas Shaxson, has been published on Naked Capitalism, the widely read U.S. finance site.

The article is entitled The “Patent Box” – Proof That the UK is a Rogue State in Corporate Tax.

We won’t paste it all till we get permission to do so, but here’s a taster:

With the UK’s “Patent Box” coming under renewed scrutiny, an explanation is in order of how nasty, disingenuous and hypocritical the thinking behind it is.

By way of background, The “Patent Box” is a tax incentive that reduces the effective UK corporation tax rate to 10% (as compared to 21%) on income attributable to patents, subject to certain conditions. Generally-speaking tax incentives like this seek to attract mobile capital to relocate to one’s home jurisdiction (or discourage it from migrating away), and the hope is that jobs and prosperity will follow (or remain, as the case may be). Other jurisdictions may try to follow suit, and the ensuing international jostling is a process that some call international tax ‘competition’. Others call it a race to the bottom. Whatever one calls it, the patent box must be understood in this context. Several European regimes have popped up in this terrain, notably in Ireland, Switzerland and the Benelux countries: Belgium, Netherlands and Luxembourg.

The UK government has been frank about the tax ‘competition’ aspect of it, expressly announcing the regime as an enhancement to the “competitiveness” of the UK tax system. In 2011, when the UK’s Patent Box regime was in development, PWC published a pamphlet entitled Is it time for your country to consider the “patent box”? which is equally frank about the realities of tax competition:

“Intellectual property (“IP”) is highly mobile and can be easily separated from the jurisdiction where it was developed and migrated to low-tax jurisdictions. Over the last few decades, a greater proportion of IP (and the resulting revenue stream) has been moved offshore to minimize tax. In response, some countries have adopted the concept of a “patent box,” a tax regime that sharply reduces the rate of corporate tax applied to income resulting from qualifying IP.”

Yet it would be a mistake to imagine that this is just about states being forced to reduce tax rates on intellectual property income because of the threat of migration. As PwC explain, the “Patent Box” regime may be a way to help states pander to the wishes of flighty corporate capital with a minimum of democratic fuss:

In general, most businesses would prefer general tax relief in the form of an overall corporate tax rate reduction. However, since in some countries incentives can be viewed politically as more feasible than reducing overall corporate tax rates, an alternative tax reform scenario could be the adoption of a patent box regime. Such a regime likely would encourage companies to locate the high-value jobs and activity associated with the development, manufacture, and exploitation of patents in-country.

Note that section in bold. . . .

Now read on.

There are some important points here, which TJN hasn’t necessarily drawn out in all their glory yet.

Note that the Swiss seem keen to get in this nasty, disingenuous and hypocritical game, too.