Germany issues warning over ‘patent boxes’ tax subsidy

Germany has warned that corporate tax subsidy arrangements known as "patent boxes" are acceptable in the European Union only as a reward for research and investment by companies in member states, not as a new tax-avoidance tool.

It comes as the Minister for Enterprise and Innovation Richard Bruton said US multinationals plan to advise the Government on what should be in the proposed “knowledge box” tax scheme.

Speaking on a five-day US trade mission, Mr Bruton said he had received “very positive feedback” on the budgetary changes in meetings with US companies in Boston on Monday and the Washington DC area yesterday.

Companies had indicated that they would participate in the Government’s consultation process on the knowledge box, which will allow companies separate income from intellectual property and pay a different tax rate on it.

Minister for Finance Michael Noonan flagged patent box or "knowledge box" arrangements in his budget speech, after scrapping the controversial "Double Irish" tax mechanism. Irish officials are examining whether to levy a 6.25 per cent tax rate on assets such as patents managed from Ireland.

Corporate tax avoidance

Senior Berlin officials have warned they would take a dim view of patent boxes being set up as a new front for corporate tax avoidance. They say they have made this clear in talks with the British treasury, with similar talks likely soon with the Netherlands, Luxembourg and Spain. A senior Berlin official said that Ireland has not yet approached Germany to explain its own plans but would get the same answer.

“With Britain we are in agreement that brassplate companies cannot be allowed use patent or licence box arrangements,” said a senior German official. “A patent box is not damaging per se but it is necessary that substantial research is going on in a country through a real, substantive company before that company is rewarded with tax breaks.”

The introduction of any such schemes require approval of EU authorities in Brussels and the conclusion of talks to overall global corporate tax rules at the Organisation for Economic Co-operation and Development in Paris.

Germany’s approval is not explicitly required but criticism of new Irish tax arrangements from Berlin could complicate matters, given that Ireland’s 12.5 per cent tax rate is already a popular punchball in German political circles.

The latest German warning comes as Mr Noonan arrives in Berlin today to sign, along with more than 50 other ministers, an international tax agreement on the automatic exchange of banking information.

Signatory countries hope the agreement marks the effective end of banking secrecy provisions that allow offshore bank accounts, hidden income and costly tax avoidance at an estimated cost to the EU alone of about €1 trillion annually.

Today’s agreement in Berlin takes place under the auspices of the Global Forum, an international network of 122 countries plus the EU, for international co-operation on taxation and financial information exchange.

More than 50 countries will sign today’s agreement on a new standard for the automatic exchange of banking information.

After the agreement goes live in September 2017 all banks in signatory countries will be obliged to forward financial details of foreign customers to tax authorities.