The Portuguese intellectual property box: issues in designing investment incentives

Author:António Martins
Position:Department of Economics and CeBER, Universidade de Coimbra, Coimbra, Portugal
Pages:86-102
SUMMARY

Purpose The purpose of this paper is to discuss tax and accounting issues related to the evolution of the intellectual property box in Portugal and present a preliminary view of its impact. In 2014, Portugal adopted an Intellectual Property (IP) box, exempting from corporate taxation half of the gross revenue obtained from selling IP rights. In 2016, the country adopted a new IP regime, in line with BEPS’ recommendations, with stricter rules for exempting income. The “modified nexus approach”, recommended by the OECD, was the cornerstone of legal changes. The research questions addressed in this paper are as follows: was ... (see full summary)

 
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The Portuguese intellectual
property box: issues in designing
investment incentives
Ant
onio Martins
Department of Economics and CeBER, Universidade de Coimbra,Coimbra, Portugal
Abstract
Purpose The purpose of this paperis to discuss tax and accounting issues related to the evolutionof the
intellectual propertybox in Portugal and present a preliminary view of its impact. In 2014, Portugal adopted
an Intellectual Property(IP) box, exempting from corporate taxationhalf of the gross revenue obtained from
selling IP rights. In 2016, the country adopteda new IP regime, in line with BEPSrecommendations, with
stricter rules for exempting income. The modied nexus approach, recommended by the OECD, was the
cornerstone of legal changes. The research questions addressed in this paper are as follows: was the
Portuguese IP box, set up in 2014, internationally competitive in terms of the scope of qualifyingassets and
the tax rate when compared to other EU countries? Could its legal design induce potential corporate tax
avoidance? Does the new IP box framework reduce avoidance opportunities and does it increase tax and
accountingcomplexity for companies and tax auditors?
Design/methodology/approach The methodology used in this paper is based on the legal research
method combined with a case study analysis of the IP box in Portugal. The economic motivation for legal
changes, the interaction between the tax authorities and the policy makers in the wake of BEPS
recommendations, and the economic crisis that Portugal faced, inuenced legislative options. A
multidisciplinaryapproach is required to analyse the IP box modications, and the methodology follows this
line of enquiry.
Findings The author concludes that the 2014 IP box was not competitive in terms of the scope of
qualifying assets and the tax rate. However, it couldbe a potential tool for tax avoidance, mainly linked to
transfer pricing strategies. Legal changes, introduced in 2016, by enacting stricter rules for granting tax
benets, t a worldwide trend of restraining prot shifting opportunities linked to intangibles. The new
framework clearlyimpacts tax and accounting complexity, for companies and tax auditors. Preliminarydata,
for 2014 and 2015, showa negligible impactof the IP box on corporate taxation.
Practical implications The modied nexus approachis not a denitive panacea for ghting tax
avoidance. Multinationalsmay move resources (e.g. highly specialized persons)to entities that are developing
IP, curtailingthe restriction associated with acquiring services from relatedparties. Tax authorities may ght
these schemes, but facea challenging task. The grandfathering option andnew accounting choices related to
expense allocation are delicateissues. Not all countries adopted BEPSrecommendations at the same time,
which may impact international prot shifting activities and increase tax authoritiescoststo control them.
The paper also providespreliminary and exploratory evidence that IP boxes, per se, do not suddenly raise the
R&D activityof rms.
Originality/value The analysis highlights legal, accounting and economic issues in dealing with
changes in investmentincentives and can or may be a useful remainder for countries in the processof setting
up, or amending,IP boxes.
Keywords Investment, Intangibles, Portugal, Intellectual property box, Tax incentives
Paper type Research paper
The author is grateful for the remarks of two anonymous reviewers, which were helpful in improving
the paper. The usual disclaimer applies.
JITLP
17,3
86
Received26 November 2017
Revised3 February 2018
9 April2018
Accepted22 April 2018
Journalof International Trade
Lawand Policy
Vol.17 No. 3, 2018
pp. 86-102
© Emerald Publishing Limited
1477-0024
DOI 10.1108/JITLP-11-2017-0044
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1477-0024.htm
1. Introduction
Intellectual Property (IP) box tax regimes should cover a wide range of income, encourage
innovation and be easy to administer (McAlister, 2011). Investment in intangibles, seen as
crucial to economic growth, is the main focus of IP boxes. A desirable IP box should attract
real and substantial innovative activity and minimize tax avoidance opportunities (Evers
et al., 2015).
In 2014, Portugal adoptedan IP box, exempting from corporate taxation halfof the gross
revenue booked from selling IP rights. The purpose of the IP regime was to create a
favourable taxation for IP-relatedincome, aiming at fostering innovation[1]. The Portuguese
regime was potentially prone to tax avoidance, by allowing intercompany related
transactions as a prot shifting strategy.The OECD (2013) developed the Base Erosion and
Prot Shifting (BEPS) project and paid special attention to intangibles held by
multinationals.Much of their prot shifting is linked to IP transactions (Kleinbard,2012).
The BEPS project addressed IP boxes and recommended preferential treatment only to
income derived from substantial innovative activities effectively carried out by taxpayers.An
European Union Directive[2]laying down rules against tax avoidance practices affecting
the functioning of the internal market also addressed the issue of ghting tax avoidance
related to IP boxes. This is supposedly achieved through the adoption of the modied
nexus approach, which assesses whether there is substantial research and development
(R&D) activity effectively carried out by companies beneting from IP boxes. In 2016,
Portugal adopted a new regime,in line with BEPSrecommendations, with stricter rules for
qualifying IP income (Ernstand Young, 2016).
The research questions addressed in this paper are as follows: was the Portuguese IP
box, set up in 2014, internationallycompetitive in terms of the scope of qualifying assets and
the tax rate when compared to other EU countries? Could its legal design induce potential
corporate tax avoidance? Does the new IP box framework reduce avoidance opportunities
and does it increase tax and accountingcomplexity, for companies and tax auditors?
Legal changes enacted in 2016, establishing stricter rules for granting tax benets, ta
worldwide trend of restraining prot shifting opportunities linked to the use of intangible
income. The new framework also presents additional sources of accounting and tax
complexity for companies and tax auditors. Preliminary data show a negligible use of IPs
tax benets, in 2014 and 2015.
The modied nexus approachis not a denitive panacea for ghting tax avoidance.
Multinationals may move resources (e.g. highly specialized persons) to associated entities that
are developing IP, curtailing the restriction linked to the acquisition of services from related
parties. Tax authorities may audit these schemes, but face a challenging task. Accounting
issues, emerging from the computation of intangiblesnet income and expense allocation, are
now of greater relevance, as explained later when dealing with the new (2016) Portuguese IP
box. Not all countries adopted BEPSrecommendations at the same time, which may impact
international prot shifting activities and increase tax auditing costs (Herzfeld, 2017). The new
IP box has a grandfathering clause, allowing the previous (2014) system to be applied until 2021.
It is not difcult to anticipate corporate accounting policies being used to make imputations to
old IP projects (more favourably taxed). Tax authorities may ght accounting/tax manipulation
schemes, but litigation will probably follow. The paper also provides preliminary and indirect
evidence that IP boxes, per se, do not suddenly increase the R&D activity of rms. In 2015, only
three Portuguese rms beneted from the old regime, and 2m euro (a negligible amount in the
context of corporate income tax data) were deducted to the total tax base.
Literature about IP boxes has been mainly addressing their impact on investment
location (Dischinger and Riedel, 2011), avoidance strategies (OECD, 2013), impact on
Designing
investment
incentives
87

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