OECD: Agreement on modified nexus approach for IP regimes

OECD: Agreement on modified nexus approach

The Organisation for Economic Co-operation and Development (OECD) recently announced that consensus has been reached around a modified nexus approach for intellectual property (IP) regimes as presented in its September 2014 report under Action 5 (Countering harmful tax practices more effectively, taking into account transparency and substance) of the base erosion and profit shifting (BEPS) action plan.

Related content

Nexus approach

In its September 2014 report, the OECD discussed possible approaches to requiring substantial activities in the context of preferential regimes such as IP regimes. One of the approaches considered was the nexus approach, which allows a taxpayer to benefit from an IP regime only to the extent that the taxpayer can show that its employees incurred expenditures, such as research and development (R&D), which gave rise to IP income.

A nexus-based approach was subsequently put forward in a joint proposal of Germany and the United Kingdom.

OECD amendments to nexus approach

The OECD has now announced that consensus has been reached around the underlying principle of the modified nexus approach proposed in its September 2014 report, with the following amendments:

  • A 30% increase in qualifying expenditures to the extent of related-party outsourced R&D expenses and IP acquisition expenses, designed to address concerns that companies’ benefits under existing IP regimes may be significantly reduced because they hold IP in different entities than those that actually incur R&D expenditures, or they incurred significant IP acquisition costs, which would be disregarded under the modified nexus approach.
  • Countries that have IP regimes that are inconsistent with the modified nexus approach are expected to take steps to amend those regimes, and there can be no new entrants (i.e., new taxpayers or new IP assets) to such IP regimes after either the date a revised IP regime takes effect or June 30, 2016.
  • Taxpayers benefitting from existing regimes that do not comply with the modified nexus approach will not be able to receive any additional tax benefits from those regimes after June 30, 2021.

Further work on the modified nexus approach to be concluded by June 2015 includes:

  • Developing a practical approach to tracking and tracing R&D expenditures, particularly those incurred prior to the adoption of the modified nexus approach
  • Considering safeguards to prevent taxpayers from inappropriately benefiting from the grandfathering rules
  • Developing more detailed guidance on what will be regarded as a qualifying IP asset (for example, the treatment of copyrighted software or innovations from technically innovative development or technical scientific research that nonetheless do not benefit from patent or equivalent legal protection)

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us

 

Request for proposal

 

Submit

KPMG's new digital platform

KPMG's new digital platform