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You Cannot Escape EU Law, No Matter How Hard You Try: Is Modified Nexus Approach in BEPS Action 5 Compatible with the State Aid Rule?
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Law, Department of Law.
2017 (English)Independent thesis Advanced level (degree of Master (One Year)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

The modified nexus approach came into existence mainly because the current patent box regimes in Europe were designed in a way that can be easily used for the profit shifting. Because the European Union law prohibits the member nations to impose limitations based on jurisdiction, companies can freely conduct R&D elsewhere and conveniently shift the income to one of the European countries to get the benefit from its patent box regime. However, because the modified nexus approach is also subject to EU law, it cannot take the most logical approach, which would have been to establish a nexus between the location of the R&D and the country providing tax benefits to the income.[1] The alternative was to focus on “entity.” Under the current modified nexus approach that is endorsed both by the OECD and the EU Code of Conduct Group, there has to be a nexus between the entity incurring R&D expenditures and the entity receiving benefits.[2] Under this approach, the R&D expenditure incurred by the related parties and the IP acquisition costs are only included in the overall expenditure, not in the qualifying expenditure in calculating the ratio applied to the overall IP income. Although this is to circumvent the long reach of EU law, the new regimes that would be adopted pursuant to the modified nexus approach will violate another EU law: State aid rule.

            Under article 107 of TFEU, State aid is prohibited when the measure has to be granted by state resources and that measure confers a selective advantage to undertakings and has to affect trade between Member States and to distort or threaten to distort competition. In assessing whether a particular tax regime is amount to a State aid, the most important question to ask is whether the regime is “selective.” In a recently decided joint case of Commission v. World Duty Free Group and Commission v. Banco Santander and Santusa, the ECJ said that a tax measure was selective if it favored some businesses over other businesses in a comparable factual and legal situation. This is the case even if a lot of businesses could claim a tax relief.  Since the modified nexus approach favors businesses that can carry out R&D on their own or through branches over businesses that choose to carry out R&D through subsidiary because of the compelling business reasons, even though the degree of control over R&D is really similar, the regimes will be “selective.” As the new regimes under modified nexus approach satisfy the other requirements of State aid well, it will violate the State Aid rule.

Besides the restriction on the outsourcing and the acquisition, the endorsed modified nexus approach has several other features. “Qualifying IP assets” are defined as a patent or functionally equivalent to a patent that is legally protected and registered. The companies also has the requirement to track innovation expenditure on an asset-by-asset basis. These two features cause serious problems when it comes to the implementation, because the definition of the qualifying IP assets are too narrow and it is practically hard to exactly track the expenditure and link it to the income.

         

 

Place, publisher, year, edition, pages
2017. , 38 p.
Keyword [en]
Tax, BEPS, Patent Box, Tax Law, State Aid
National Category
Law
Identifiers
URN: urn:nbn:se:uu:diva-322663OAI: oai:DiVA.org:uu-322663DiVA: diva2:1099059
Educational program
Master Programme in International Tax Law and EU Tax Law
Supervisors
Examiners
Available from: 2017-06-27 Created: 2017-05-29 Last updated: 2017-06-27Bibliographically approved

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