47–49 Pearse Street, Dublin 2, IRELAND

Mr Raffaele Russo Head of BEPS Project Organisation for Economic Cooperation and Development

2 rue André-Pascal 75775,

Paris Cedex 16

France

by email to FHTP@oecd.org

19 February 2015

Dear Mr Russo,

Preferential Regimes And Intellectual Property

INTRODUCTION

We are writing to comment on the Preferential Regimes as described primarily in Chapter 4 of the September 2014 BEPS Deliverable on Action Point 5 “Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance”, and by reference to the report of the OECD Secretary General to the G20 Finance Ministers and Central Bank Governors in Istanbul in February 2015.

We accept this is a particularly difficult area within the project. The main purpose of this letter is in keeping with other contributions by CCAB-I to the BEPS project, namely to point out particular difficulties for smaller economies in implementing aspects of the BEPS proposals.

We note the endorsement of the Modified Nexus approach as proposed by Germany and the UK by the G20 Leaders. We have no difficulty with the concept of substantial activity, and note that the various corporate tax incentives available in our jurisdiction, Ireland, are predicated on the existence of substantial activity. Chief among these is of course the availability of the 12.5% rate of Corporation tax for trading activities.

Definition of Qualifying Intellectual Property

We welcome the recognition by the Forum on Harmful Tax Practices (FHTP) on the need for clarity on the definition of qualifying IP, as noted in the report of the OECD Secretary General to the G20 Finance Ministers and Central Bank Governors earlier this month. We understand that the FHTP is to produce further guidance on this definition.

We note the objective of ensuring that qualifying IP assets reflect the outcome of innovation activity that has resulted in technical, technological and scientific advances. Such advances provide a necessary spur for economic growth. The approach to IP regimes should be capable of being scaled to fit both larger and smaller economies and we are concerned that this may not be the case if the definition of qualifying IP assets were too tightly confined to IP assets which, although they embody innovation outcomes at the highest standard, are not formally registered in like manner to patents. We have set out below our experience of commercial practice in protecting IP assets and our suggestions for the types of IP assets that should meet the criteria of ‘patents or their functional equivalents’.

Frequently, best commercial practice suggests that the output from R&D activity should not be codified in a patent application. It may be deemed more important to keep the scientific or technical advance acquired through R&D strictly confidential within the business for as long as possible. Different territories may have different procedures and standards of recognition, and indeed different turnaround times, in securing patents. Businesses with strong innovation content in their products can create IP assets which are recognised as trade secrets (which can, for example, include secret processes, secret formulas or recipes).

In other instances, the time and effort required for the patenting process may not be justified by the commercial benefit conferred in the use of the advance. This can be the case especially for smaller businesses operating internationally and for business based in smaller economies which seek to exploit the IP through sales of goods, products, etc. in larger markets. For many businesses operating in smaller economies, the costs of registering patents across multiple jurisdictions may simply not be merited in commercial terms.

Although IP assets in fast-moving industries may in some markets be capable of patent protection, a prime example being software, where the commercial emphasis is on the rapid application, rather than longer term protection the company may choose not to patent the application but seek to protect its interests by enforcing copyright or other rights. In some cases in the software sector, a company might deliberately choose to share technical developments in software applications it creates by writing the application in open source code so that it can earn future profits from the adoption and use of the application by others. These diverse commercial practices in protecting IP assets does not mean however that an IP asset which arises technical development activities and which is not patented is in any way less valuable.

If the BEPS project is concerned to ensure that the availability of preferential regimes is not confined solely to larger economies, we hope that the FHTP in its clarification work will recognise intangible property which is capable of legal protection as qualifying IP. We believe that this could be defined to include IP assets which have been created from research or development activities that meet recognised international standards for scientific and technical development such as those set out in the OECD’s Frascati Manual, 2002. The types of intangible assets which are capable of being recognised as separate assets under the identifiable technology-based assets definition under International Financial Reporting Standards would seem to us to present a useful starting place for defining qualifying IP assets.

Where the meaning of qualifying IP assets for IP regime purposes could draw on existing international standards for R&D and for accounting standards recognition of assets, we believe that this would provide business operating in smaller economies with a well understood starting point.

Therefore we suggest that qualifying IP assets should include:

• Patented rights (including plant variety rights and market authorisations related to patents)
• Unpatented technology
  • Software (whether or not protected by copyright)
  • Design rights
  • Trade secrets (secret processes, secret formulas and recipes)
  • know-how which is the subject of a licensing agreement with an independent third party

Computing Eligible Expenditures

If it is accepted that it is the proportion of expenditures on R&D type activities which may be used to reflect entitlement to favourable tax treatment, the likelihood is that activities within smaller economies will always be in smaller proportion to activities to larger economies. All else being equal, expenditure volumes will always accrue within larger economies to a far greater extent than within smaller economies. A raw apportionment of eligible development costs across territories is unlikely to produce fair results consistently. This is especially in situations where the critical element of R&D, essential to finally bring the product to market, might constitute only a small proportion of the total R&D expenditure within a corporate group. We think it is essential to ensure, at the very least and indeed as suggested by the Action 5 report, that the proportion approach remains a “rebuttable presumption”.

Recognising the limitations on R&D resources with narrow specialist skills that exist in smaller economies, we suggest that equal treatment should be given to outsourced expenditure of a company which is actively overseen and controlled by it e.g. if a business buys in specialist expertise available elsewhere in the group in carrying out its R&D activities, this should be treated in like manner to R&D costs and other expenditure on creating a qualifying IP asset that is directly incurred by it.

You may wish to note that these comments are from a representative body. The Consultative Committee of Accountancy Bodies – Ireland is the representative committee for the main accountancy bodies in Ireland. It comprises Chartered Accountants Ireland, the Association of Chartered Certified Accountants, the Institute of Certified Public Accountants in Ireland, and the Chartered Institute of Management Accountants, which represent a combined membership of some 40,000 accountants.

We would welcome an opportunity to meet with you to discuss the items highlighted in this letter. Brian Keegan, Director of Taxation at Chartered Accountants Ireland (brian.keegan@charteredaccountants.ie, +353 1 6377 347) may be contacted if any further details in relation to this letter are required.

Yours faithfully

Paul Dillon, Chairman, CCAB-I Tax Committee