09/01/2015 08:06 GMT | Updated 11/03/2015 05:59 GMT

A Patent Regime

As Mark Twain said, "Reports of my death are an exaggeration." The same might be said about the UK's Patent Box regime; a flagship tax policy, which was first mooted in Alistair Darling's pre-budget report in 2009 and finally launched by George Osborne in 2012.

The policy was endorsed by the giants of the pharmaceutical industry, for whose benefit the rules were quite obviously designed, albeit that other companies, including SMEs, could also benefit. The Chancellor's pitch was that the regime, which offers a reduced rate of corporation tax (10 per cent) on profits derived from products involving patents, was designed to provide a tax incentive to companies developing new technologies in the UK and protecting them via the UK and European patent systems.

In reality, the policy objectives were much broader than the official line. The Patent Box was intended to encourage multinational organisations to divert earnings from patented technologies into the UK tax net - and away from the tax base of other jurisdictions. This was presumably on the basis that 10 per cent of something is preferable to 100 per cent of nothing.

It is perhaps not surprising, therefore, that our European partners cried foul. Germany, which did not have its own patent box, made most noise but were joined by other EC countries which did. They presumably saw their historical competitive advantage being eroded.

What was paraded as a fiscal incentive to indulge in an entirely virtuous and economically valuable activity therefore became a "Harmful Tax Practice" to be stamped out. Having no doubt been "leaned on" by Germany at the G20 summit in Brisbane, the UK Chancellor agreed to a joint proposal to be put to the OECD Forum on Harmful Tax Practices. This involved the "closure and abolition" of all existing Patent Box regimes and aligning all IP-based tax incentives with the relevant economic activity. A cynic might regard the proposal as "retaliating first" with a view to influencing the direction of travel of the OECD's work in this area to suit the two countries' agendas...

Assuming all 44 countries involved in the project agree to the proposal (including those with arguably more accessible Patent Box regimes than our own), does that mean the end of the road for the Patent Box concept? Absolutely not; but is this necessarily a good thing? Existing regimes will be regularised to be seen to comply with the OECD standard, whilst striving to maintain a competitive edge, and countries that don't have a Patent Box will be pressurised into introducing one. Ireland and Switzerland are already working on schemes and Germany may itself join the party.

Ultimately, this will lead to an erosion of company tax revenues across the OECD countries and the slack will have to be taken up elsewhere, through increased taxes on individuals, or on sales, or in growing public debt.

The OECD will undoubtedly need to assume a policing role in ensuring that the member countries are truly playing the game, whilst its mandate is clearly that it must respect the sovereignty of each country in setting its own rules. Quite how the organisation will square that particular circle is unclear.

How will this play out in the UK?

Given our cricketing heritage, and our national predilection for "gold plating" the rules imposed on us by those clubs of which we are a member, expect a redesigned Patent Box to come into force from 2016 for those barred from entering the existing scheme. Those already in the scheme by June 2016 will retain the benefits until 2021 and be able to transition across to the redesigned scheme thereafter.