More thoughts on the UK's IP tax reform document

Now back in the UK, and with a functioning computer again, I’ve been digging a little further into the other IP proposals in the HM Treasury Corporate Tax reform document, and looking at the review of the intangibles tax regime published by HMRC – see earlier post for the patent box proposals.

CFC reforms:

Finance Act 2011 will include some interim reforms to the controlled foreign companies* rules and, in particular, a new exemption for CFCs meeting certain conditions. In particular, the conditions include the requirement that the CFC must receive at most an incidental amount of IP income, where “incidental” ≤ 5%.

Secondly, FA 2011 will include a specific exemption from the CFC rules for a CFC with main business of IP exploitation; provided that the IP and CFC have minimal connection with the UK (ie: this is intended to exempt CFCs that do business almost entirely outside the UK). No specific thresholds are given, but when considering whether the IP has a minimal UK connection, the business should review whether the IP was ever held in UK, and whether any R&D was done in the UK. When considering whether the CFC has a minimal UK connection, the company should consider the extent/nature of any UK equity funding, whether there are any receipts from the UK, and what expenses have been incurred in the UK.

*CFC: for the non-tax specialists – a controlled foreign company is a subsidiary of a UK company that is located in a low/no tax jurisdiction. The CFC rules are intended to ensure that UK companies don’t dump profits into these subsidiaries to divert taxable income from the UK – they achieve this by taxing the UK parent on the profits of the CFC, unless an exemption is available. At present, the rules are rather more restrictive than is competitive or compatible with modern multinational business, and so reform is being considered as part of the corporate tax reform package.

IP tax regime review

HMRC commissioned a review of the IP tax regime, introduced in 2002, from Ipsos Mori. The conclusions aren’t wildly startling:

• The intangibles regime was considered important to decision making, in so far as intangibles were often felt to be vital to business success. However, it was not influential on what decisions were made - it influenced how deals were structured, rather than whether or not they took place at all.
• The UK regime was therefore typically felt to be of little consequence in acquisitions
• Ultimately, the UK regime was viewed as neither favourable nor unfavourable – taxation of intangibles was seen as part of doing business, rather than a direct influence on the decision making process.
• While the tax regime introduced in 2002 was appreciated by companies for making the law clearer, most did not believe that decision making regarding intangible assets would have been any different before this time.

Irish film and TV programme makers get tax boost

From the most recent Media & IP Newsletter of Dublin solicitors Philip Lee comes news of what it terms "Dramatic enhancements to Ireland's Film Tax incentive". The news item reads as follows:

"Ireland’s film and television industry has received a welcome boost from the Minister for Arts, Sport and Tourism, Martin Cullen. In a press release issued on 8 December 2008, the Minister outlined significant enhancements to the Section 481 relief for investment in film and television projects. The enhancements will be brought about by the Finance Bill (No. 2) 2008 that is currently being considered by Ireland’s houses of parliament.

Section 481 is a tax relief available to Irish investors who buy shares in a special purpose film or television production company (“SPV”). Under the current scheme, each individual tax-payer may invest up to €31,750 annually in qualifying projects, 80% of which can be written off for tax purposes.

Up to 80% of a film or television project’s budget can be raised using Section 481 investments, subject to a maximum of €50 million per project. However, in order to access the investor funds it is usually necessary for the producer to set aside (using a banking mechanism known as “defeasance”) an agreed minimum return which is to be paid to the SPV on completion, delivery and acceptance of the project and which is ultimately returned to Section 481 investors. Therefore in practice the typical “net benefit” to the producer is currently about 20% of the total Section 481 funds raised.

The proposed changes will result in an increase to €50,000 in the annual investment limit for each individual tax-payer and, crucially, an increase from 80% to 100% in the amount of the investment that can be written off for tax purposes. This means that for each investor the available tax relief in cash terms will nearly double from
€10,414 to €20,500.

The net effect of the proposed changes is expected to be a large increase in the producer’s net benefit. Initial indications are that a net benefit of around 28% should be achievable in some cases, depending on various factors including project scale.

The planned enhancements require “state aid” approval from the European Commission. Once implemented, they should re-establish Ireland as one of the most attractive global locations for film and television production and are to be warmly welcomed by producers in Ireland and abroad".