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.

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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)

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