CIPA defends UK patent box

From Treasury to Treasure? Tax-
efficiency from the Patent Box*

The United Kingdom's Chartered Institute of Patent Attorneys has been quick to defend the increasingly-repeated assertion that the British "patent box" tax scheme [frequently discussed on IP Finance since it was originally proposed: see pieces listed here] is simply a tax avoidance device, rather than a mechanism for encouraging investment.  In to a media release last week, CIPA's President Chris Mercer nails the myth firmly.  The media release reads as follows:

‘Patent box’ designed  to encourage innovation, not avoid tax, says patent attorneys’ president 

“Headlines in today’s media linking the ‘patent box’ to tax avoidance measures are missing the point,” says Chris Mercer, President of the Chartered Institute of Patent Attorneys. 

“Fiscal measures are one of the few tools government can use to influence corporate behaviour,” he says. “The Patent Box has only just come into effect, but there are already signs that it is having a positive effect. Companies – especially mid-size, technology-based enterprises – are starting to incorporate IP into their strategic plans. Patent attorneys are being invited to talk to main boards, not just to the R&D department [Both of these are 'attitude-changers' rather than anything else, but attitude-changing is vital if we expect there to be a change in investment behaviour too]. This is good example of how a government initiative is actually achieving the desired effect – encouraging businesses to innovate and add value by protecting their IP. 

“The idea that anyone would start inventing things and patenting them as a way of avoiding tax is nonsensical,” he added. 

There has also been an increase in patent applications at the Intellectual Property Office. ”This increase is a welcome and much-needed,” said the CIPA President. “UK companies have been falling behind their foreign competitors in terms of patent filings. The Patent Box and other government  measures to encourage innovation may have helped reverse the trend.

This blogger doubts that there is any correlation between the availability of patent box tax breaks and the number of patents filed.  In his view, given the cost and the sheer effort that attends the filing of most patents, and the negative return that most of them can realistically expected to deliver, anything that encourages investors to commit to new products and processes rather than concentrate on old, tried-and-tested ones, should be warmly welcomed.

* The illustration is of a Merck family Treasure Chest Christmas Ornament, available here for US$ 18.99.

Dutch sandwich in danger, but most of the pie remains untaxed

From Mary-Ellen Field (Chairman, Brand Finance), via Mark Colvin, comes news of "No more “Dutch Sandwich”? The Netherlands reviews its role in tax avoidance" by Cyrus Farivar, posted on Ars Technica last week (here). According to this post, in relevant part:

"In recent years, governments have become increasingly aware of the fact that lots of major corporations -- notably tech companies including Apple, Google, Yahoo, Dell, and many others -- are using shady, albeit legal, techniques to shift income in ways that drastically minimize a company's tax burden. A trick known as the “Dutch Sandwich,” in which companies move money through the Netherlands, has become one of the preferred ways of reducing a firm's financial liability. ...

Here’s how it works: as Bloomberg also reported in 2010, a company sells or licenses its foreign rights to intellectual property developed in the United States to a subsidiary in a country with lower tax rates. That means that in many cases, companies will license their own IP to one of their own foreign subsidiaries (often based in Ireland), whose profits then stop over in the Netherlands. In turn, those profits finally settle in Bermuda, a British overseas territory in the North Atlantic, and a notorious tax haven. ...".

Last Wednesday, however, a Dutch parliamentary committee met to consider the fairness of its own tax system and to re-evaluate its role as part of a legal financial chain that allows companies to reduce the amount of tax they pay. Other European countries, including the United Kingdom, Ireland and France, are also looking more closely at the tax arrangements of international IT and online businesses, which either pay little tax of any description or, when they do pay tax, they tend not to pay it in European countries in which they have been profitably trading.

 It seems to this blogger that European countries will have to sort out their priorities before they can individually get to grips with the problem of international companies which earn megabucks and pay little or no tax in the EU.  This is because real and meaningful taxation is only going to be raised when all 27 (soon to be 28) Member States have identical tax rules, while each EU Member State would like to be seen to be that bit more attractive in tax terms than its neighbours, in order to attract foreign businesses to base themselves and their IP portfolios locally.  The businesses themselves will naturally wish to exploit any tax differentials and pay where tax is at the lowest rate, thus encouraging a race to the bottom.

Double Irish Dutch Sandwich explained here

Film finance not "trade", rules FTT

Decisions of the UK's First-Tier Tax Tribunal don't often get a mention on this blog, but Eclipse Film Partners No 35 LLP v Revenue & Customs [2012] UKFTT 270 (TC)  looked quite interesting, this being a lengthy decision of Judges Edward Sadler and John Walters QC of 20 April.


Eclipse, an investment partnership, was incorporated in October 2006 and comprised 289 members. According to its partnership deed, its business was the production, distribution, financing and exploitation of films. Eclipse struck a complex licensing agreement with Disney under which each member made substantial contributions of capital to pay the licence fee, stumping up some £50 million of their own cash and borrowing another £790 million under a 20-year facility. At the same time, the film rights were sub-licensed to a distributor, which agreed to pay annual specified sums over a 20-year period. Eclipse then entered into a marketing services agreement as a means of supervising the implementation of the distributor's release plans for the films, as well as a consultancy agreement relating to the future selection, acquisition and exploitation of films and film rights. 


In its first partnership return, Eclipse said it was carrying on a commercial trade of acquiring and exploiting film rights, although no profits had yet accrued. In reliance on the Income and Corporation Taxes Act 1988 sections 353 and 362, its members claimed tax relief in respect of the interest paid on their borrowings. 


The Commissioners for Customs and Revenue considered that there was no entitlement to tax relief because Eclipse was basically just a vehicle for speculative investment rather than a trade. Were they right?.

Dismissing Eclipse's appeal, the FTT explained that the burden was on Eclipse to establish that it was carrying on a trade, not for the Commissioners to disprove it.  The transactions and arrangements entered into by Eclipse were not a sham; indeed, they had legal effect according to their terms, and the fact that they were set up as a tax avoidance scheme did not automatically mean that they could not be trade.  The killer punch here, though, was that the way Eclipse's members financed their capital contributions and the extent to which they did so was extraneous to Eclipse's actual activities.


On these facts, said the FTT, the interdependent and coterminous licensing and distribution transactions entered into by Eclipse did not have the speculative aspect that could be expected of trading transactions. True, the sub-licence produced profit -- but the bulk of that profit was predetermined and could not be regarded as the speculative profit of a trading venture. Any additional profits which might materialise were clearly viewed as a bonus rather than a profit reasonably to be expected. In commercial terms, Eclipse did not have a "customer" but had merely been given the opportunity by Disney of participating in its licensing arrangements.