Beps Action 5 Agreement On Modified Nexus Approach For Ip Regimes

OECD/G20 Base Erosion and Profit Shifting Project
Action 5: Agreement on
Modified Nexus Approach for
IP Regimes
OECD/G20 Base Erosion and Profit Shifting Project
Action 5: Agreement on
Modified Nexus Approach
for IP Regimes
Photo credits: Cover © archerix / Fotolia.fr
© OECD 2015
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AGREEMENT ON MODIFIED NEXUS APPROACH FOR IP REGIMES – 3
This consensus achieved by the FHTP builds on the joint proposal by Germany and
the UK and aims to resolve the concerns countries have expressed about some features of
the Modified Nexus Approach and identify what further work is required in order to
enable agreement to be reached on this issue during 2015. Concerns have been expressed
about how to calculate qualifying R&D expenditure, transitional arrangements between
regimes and time allowed for this through grandfathering provisions, and the tracking and
tracing methodology for R&D expenditure that will determine whether it qualifies.
The proposal is based on the following elements, which seek to address the concerns
that have been raised, whilst reinforcing the nexus approach, providing safeguards against
profit shifting, and ensuring that there is equal treatment across all sectors and businesses
of different sizes. These also aim to ensure that the approach to implementing new rules
is consistent with existing OECD rules on the phasing out of harmful regimes.
A) The Modified Nexus Approach – conceptual issues
1. Nexus Approach: General acceptance of the Modified Nexus Approach as presented in

the OECD Report on Action 5, but requiring further modifications relating to the level
of qualifying expenditure, grandfathering provisions and the tracking and tracing of
expenditure:
2. Up-lift: Under the currently proposed Modified Nexus Approach, businesses using
already existing Patent Box regimes might see a reduction in income receiving
preferential treatment, as R&D expenditure to develop the patent must be undertaken in
a more limited number of entities, including the company holding the relevant patent, to
qualify. This could impose restructuring costs on groups which have dedicated R&D
companies in order for them to retain the relief in future. Furthermore, to disregard any
IP acquisition costs at all might have an impact on commercial decisions. To reflect
these concerns raised by businesses, countries may allow for an up-lift of qualifying
expenditure within the Modified Nexus Approach. However, one needs to take into
account that the very conceptual basis of the Modified Nexus Approach is intended to
ensure that, in order for a significant proportion of IP income to qualify for benefits, a
significant proportion of the actual R&D activities must have been undertaken by the
qualifying taxpayer itself. Accordingly, such up-lift needs to be restricted. It may only
be granted to the extent that expenditure in the context of outsourcing and acquisitions
has actually taken place, and it is in any case limited to a certain percentage of the
qualifying expenses of the respective company: 30%. This percentage-based limitation
relates to the overall amount of both outsourcing and acquisition costs. For the
avoidance of doubt, acquisition costs and expenditures for outsourcing to related parties
are not included in qualifying expenditures, but are taken into account in determining
the limitation described in the preceding sentence 1.
1
This does not change the effect of note 8 on page 51 of the 2014 Deliverable on Countering Harmful Tax
Practices More Effectively (OECD, 2014).
© OECD 2015
4 – AGREEMENT ON MODIFIED NEXUS APPROACH FOR IP REGIMES
Example (1):
Parent company incurred qualified expenses of 100,

parent company incurred costs for acquisition of IP assets of 10,
subsidiary company incurred R&D expenses of 40.
• Maximum up-lift amount = 100 x 30 % = 30
• Overall qualifying expenses including a limited percentage of outsourcing and
acquisition costs = 130
Example (2):
Parent company incurred qualified expenses of 100,

parent company incurred costs for acquisition of IP assets of 5,
subsidiary company incurred R&D expenses of 20.
• Maximum up-lift amount = 100 x 30 % = 30
• Overall qualifying expenses including a limited percentage of outsourcing and
acquisition costs = 125
B) Timing, grandfathering and reporting issues
1. Close old regime to new entrants: Countries choosing to have IP regimes will need to
bring the applicable rules in line with the Modified Nexus Approach. That means that
there can be no new entrants to any existing regime after the date that a new regime
consistent with the modified nexus approach takes effect, and no later than 30 June
2016. The FHTP further agrees that any legislative process necessary to make this
change must commence in 2015. This transition period for the closure of existing
regimes to new entrants recognises that countries will need time for any legislative
process.
“New entrants” include both new taxpayers not previously benefiting from the regime
and new IP assets owned by taxpayers already benefiting from the regime. Further, it is
understood that new entrants are only those that fully meet all substantive requirements
of the regime and have been officially approved by the tax administration, if required.
New entrants therefore do not include taxpayers that have only applied for the regime.
2. Final abolition of old regime: In order to give protection for taxpayers benefiting from
existing regimes, countries are allowed to introduce grandfathering rules. Under such
rules, all taxpayers benefiting from an existing regime may keep such entitlement until
a second specific date (“abolition date”). The period between the two dates should not
exceed 5 years (so the abolition date would be 30 June 2021). After that date, no more
benefits stemming from the respective old regimes may be given to taxpayers.
© OECD 2015
AGREEMENT ON MODIFIED NEXUS APPROACH FOR IP REGIMES – 5
3. Further work to be concluded by June 2015:
• Reporting requirements under Modified Nexus Approach: An approach to the

tracking and tracing of R&D expenditure, that is practical for tax authorities
and companies to implement, needs to be developed in order to implement the
Modified Nexus Approach. Agreement will also be needed on transitional
provisions to enable companies to transfer IP from existing regimes into new
regimes. The FHTP acknowledges that it might be difficult for companies to
provide detailed information about qualifying expenditure for past years under
the Modified Nexus Approach if – until the time at which new rules are
introduced – there is no requirement for them to track such expenditure. The
FHTP will agree practical methodologies for identifying qualifying expenditure
that companies and tax authorities should use recognising the particular issues
regarding qualifying expenditure with respect to expenses incurred prior to the
introduction of the Modified Nexus Approach. Failure to do so will mean that
no tax benefit may be granted to those companies under the Modified Nexus
Approach. Special rules will be developed for this time period to ease the
tracking and tracing of such expenditure.
• Additional safeguards: The FHTP will continue to discuss measures to mitigate

the risks that new entrants seek to avail themselves of existing regimes with a
view to benefiting from grandfathering. Examples could include enhanced
transparency (e.g. requiring spontaneous exchange of information on taxpayers
benefiting from a grandfathered regime regardless of whether a ruling is
provided), monitoring of new entrants, and possible restrictions, so as to
mitigate the risk of new entrants availing themselves of existing regimes with a
view to benefiting from grandfathering.
• Guidance on the definition of qualifying IP assets: Under the Modified Nexus

Approach the only IP assets that could qualify for benefits under an IP regime
are patents and functionally equivalent IP assets that are legally protected and
subject to approval and registration processes, where such processes are
relevant. The Modified Nexus Approach explicitly excludes from receiving
benefits marketing-related IP assets such as trademarks. The FHTP recognises
the need for clarity on the definition of qualifying IP assets. The FHTP will
therefore produce further guidance on this definition, addressing in particular
the exact scope of IP assets, for example, the treatment of copyrighted software
or innovations from technically innovative development or technical scientific
research that do not benefit from patent protection, always provided of course
that such assets have been developed with sufficient nexus.
© OECD 2015

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OECD/G20 Base Erosion and Profit Shifting Project

A) The Modified Nexus Approach – conceptual issues

1. Nexus Approach: General acceptance of the Modified Nexus Approach as presented in

Parent company incurred qualified expenses of 100,

Parent company incurred qualified expenses of 100,

B) Timing, grandfathering and reporting issues

3. Further work to be concluded by June 2015:

• Reporting requirements under Modified Nexus Approach: An approach to the

• Additional safeguards: The FHTP will continue to discuss measures to mitigate

• Guidance on the definition of qualifying IP assets: Under the Modified Nexus

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