The Portuguese intellectual property box: issues in designing investment incentives

Abstract

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 the Portuguese IP box, set up in 2014, internationally competitive 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 accounting complexity 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, influenced legislative options. A multidisciplinary approach is required to analyse the IP box modifications, 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 could be a potential tool for tax avoidance, mainly linked to transfer pricing strategies. Legal changes, introduced in 2016, by enacting stricter rules for granting tax benefits, fit a worldwide trend of restraining profit shifting opportunities linked to intangibles. The new framework clearly impacts tax and accounting complexity, for companies and tax auditors. Preliminary data, for 2014 and 2015, show a negligible impact of the IP box on corporate taxation. Practical implications The “modified nexus approach” is not a definitive panacea for fighting tax avoidance. Multinationals may move resources (e.g. highly specialized persons) to entities that are developing IP, curtailing the restriction associated with acquiring services from related parties. Tax authorities may fight these schemes, but face a challenging task. The grandfathering option and new accounting choices related to expense allocation are delicate issues. Not all countries adopted BEPS’ recommendations at the same time, which may impact international profit shifting activities and increase tax authorities’ costs to control them. The paper also provides preliminary and exploratory evidence that IP boxes, per se, do not suddenly raise the R&D activity of firms. Originality/value The analysis highlights legal, accounting and economic issues in dealing with changes in investment incentives and can or may be a useful remainder for countries in the process of setting up, or amending, IP boxes.

What’s Happening with the Patent Box Regimes? A Systematic Review

“…Patent Box documents were developed around four themes or research interests: effects on company performance, impacts on patent activity, effects on patent location, and descriptions of the Patent Box regime (including the Nexus approach). See Appendix A with the relevant information summarized from the selected research articles list Qualitative papers were focused on the implementation and evolution of Patent Box [38,39], trust in government and trade issues [24], the Nexus Approach [23,27], its effectiveness [40], and experience in countries with earlier implementation [41]. In addition, qualitative studies generally analyzed a single country such as Portugal [38], Germany [40], Luxembourg [27], the United States [23,42], and United Kingdom [39]…”

“…Patent Box documents were developed around four themes or research interests: effects on company performance, impacts on patent activity, effects on patent location, and descriptions of the Patent Box regime (including the Nexus approach). See Appendix A with the relevant information summarized from the selected research articles list Qualitative papers were focused on the implementation and evolution of Patent Box [38,39], trust in government and trade issues [24], the Nexus Approach [23,27], its effectiveness [40], and experience in countries with earlier implementation [41]. In addition, qualitative studies generally analyzed a single country such as Portugal [38], Germany [40], Luxembourg [27], the United States [23,42], and United Kingdom [39] Qualitative papers discuss the Patent Box's effect on states due to harmful tax competition and migration of intangible assets [24].…”

“…See Appendix A with the relevant information summarized from the selected research articles list Qualitative papers were focused on the implementation and evolution of Patent Box [38,39], trust in government and trade issues [24], the Nexus Approach [23,27], its effectiveness [40], and experience in countries with earlier implementation [41]. In addition, qualitative studies generally analyzed a single country such as Portugal [38], Germany [40], Luxembourg [27], the United States [23,42], and United Kingdom [39] Qualitative papers discuss the Patent Box's effect on states due to harmful tax competition and migration of intangible assets [24]. These practices led to the BEPS Action 5 deals, with two different versions, one focusing on entities and another on the underlying R&D [27].…”

The Effects of Taxes on Innovation: Theory and Empirical Evidence

“…Li et al (2021) study the effects of the addback statute and find a statistically and economically significant decrease of 5% in the number of citations received by patents and of 4.77 percentage points for the number of patents filed by relevant firms after three years. Furthermore, Martins (2018) contends that implementation of the nexus approach in 2016 to the Portuguese IP box significantly increased tax and accounting complexity. Mohnen et al (2017) analyze the Dutch innovation box policy, which requires that the tax advantage must be linked to the firm's own and, therefore, local R&D activity.…”

Group Transactions, Transfer Pricing and Litigation: Evidence from Portugal

“…The identification of a comparable operation may be a demanding task. 21 Considering the diversity of elements to be examined when tax auditors test the comparability of operations in a substantial number of situations, TAs and taxpayers have opposing views as to what should be the most appropriate comparable. 22 In a significant number of cases, TAs opt for internal comparables and are challenged by taxpayers on the basis that those comparables lack robustness given differences on product specification, market segmentation, and the financial conditions of the operation that are not comparable with goods and services that are sold to independent parties.…”