Pressure on France over failure to reform patent box system

France is under pressure from a number of other EU states over its failure to reform its patent box system despite agreeing to do so in 2014.

The corporate tax device allows French companies to apply a 15 per cent tax rate on intellectual property activity rather than the standard rate of 35 per cent. A number of EU countries believe the regime is a harmful tax practice, and a source of unfair competition in the single market.

The issue has come before the Code of Conduct group on business taxation, a Brussels-based group that comprises officials representing all EU states. While the group has no statutory basis it plays an important role in tackling unfair tax practices and bringing pressure on countries to abolish harmful tax devices.

France's increasing isolation on the issue comes as French prime minister Manuel Valls said that EU states must "progress towards common European tax rates", adding "if not all 27 countries are ready to do so, then we must move forward with those who can".

Writing in the Financial Times, Mr Valls described the European Commission's Apple decision as "courageous and welcome".

“It is unacceptable for multinational companies to do everything in their power to avoid paying tax in the countries in which they make their profits,” he said in an article that explored the future of the EU.

Bailout

France has been a long-time critic of Ireland’s corporate tax regime, with former French president

Nicolas Sarkozy

raising the issue during the height of Ireland’s bailout negotiations when he suggested the country’s corporate tax rate should be changed in exchange for bailout funding.

France’s opposition to reforming its patent box system is based on its assertion that only French businesses rather than foreign companies use the device.

Yet other countries have agreed to ensure their patent box regimes are in compliance with the so-called “modified nexus regime” as outlined in the OECD’s Base Erosion and Profit Shifting proposals. The so-called modified nexus approach is a new methodology which ensures that the reduced tax rate only applies to profits generated from intellectual property devised within that country.

Some 12 European countries have patent box regimes, including Ireland which introduced the “knowledge box” system in 2014 following Britain’s introduction of the system the previous year.

Tax liability

But there have been calls, particularly in the European Parliament, for greater EU oversight and reform of patent boxes which can be used by companies to significantly slash their tax liability.

The issue is likely to return to focus in early November when the Code of Conduct group is due to meet in Brussels.

The 12 countries which operate patent boxes are Ireland, Britain, Belgium, Netherlands, Luxembourg, Cyprus, Malta, Spain, Portugal, France, Hungary and Italy.

Meanwhile, the European Commission is pressing ahead with plans to announce a new Common Consolidated Corporate Tax Base in the coming weeks. Any such proposal will have to be signed off by all 28 EU commissioners.