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. The Portuguese
regime was potentially prone to tax avoidance, by allowing intercompany related
transactions as a proﬁt shifting strategy.The OECD (2013) developed the Base Erosion and
Proﬁt Shifting (BEPS) project and paid special attention to intangibles held by
multinationals.Much of their proﬁt 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–laying down rules against tax avoidance practices affecting
the functioning of the internal market –also addressed the issue of ﬁghting tax avoidance
related to IP boxes. This is supposedly achieved through the adoption of the “modiﬁed
nexus approach”, which assesses whether there is substantial research and development
(R&D) activity effectively carried out by companies beneﬁting from IP boxes. In 2016,
Portugal adopted a new regime,in line with BEPS’recommendations, 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 beneﬁts, ﬁta
worldwide trend of restraining proﬁt 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 IP’s
tax beneﬁts, in 2014 and 2015.
The “modiﬁed nexus approach”is not a deﬁnitive panacea for ﬁghting 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 intangibles’net 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 BEPS’recommendations at the same time, which may impact
international proﬁt 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 difﬁcult to anticipate corporate accounting policies being used to make imputations to
old IP projects (more favourably taxed). Tax authorities may ﬁght 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 ﬁrms. In 2015, only
three Portuguese ﬁrms beneﬁted 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