1. UK Patent Box The Modified Nexus approach Position as at March 2015 Confluence Tax LLP

2. Background Widespread concern over multinationals profit shifting to low tax regimes to reduce global tax liabilities. OECD has begun several work-streams of a BEPS (‘Base Erosion Profit Shifting’) project. Patent or IP box regimes in all OECD countries (including UK, Netherlands, Luxembourg, Belgium) are under consideration in this review. Confluence Tax LLP

3. Current UK patent box rules Benefit assessed by reference to qualifying income. 10% rate for income from patents. Management and development requirements to stop patent trolls. Confluence Tax LLP

4. Modified Nexus Approach Aims to link patent income to the expenditure that created it The income that can benefit from patent box rates is limited to: Related party outsourcing and acquisition costs reduce potential patent box benefits Qualifying expenditure + maximum uplift of 30% Qualifying expenditure + related party outsourcing + cost of acquisitions X Income Confluence Tax LLP

5. Simplest example All R&D is in-house or with third parties No acquisitions No related parties Outcome There is complete nexus between R&D and income in the company All patent income benefits from the patent box Key questions What is included as expenditure and over what timescale- the practicalities of ‘tracking and tracing’ How will income be arrived at? How will related parties be defined? What will happen on acquisitions? Single Company Confluence Tax LLP

6. Acquisitions Purchase the company Single company, not group basis Consider the acquired company’s history Post acquisition restructuring may be restricted Purchase the asset ‘Taints’ the modified nexus formula How much of an impact given the future costs to market? Single UK company Patents and associated assets Confluence Tax LLP

7. Related parties IP Company owns patent IP, or has an exclusive licence to the patent IP, and earns patent income. R&D work is subcontracted to R&D Subsidiary. Outcome The proportion of income permitted by the modified nexus formula is zero, as there is only related party R&D cost. There is insufficient nexus between the R&D costs and the patent income => No income can benefit from the preferential regime. Impact The restriction could apply equally to UK and non- UK R&D subsidiaries. Proposal potentially goes further than is required to address base erosion. IP Company R&D Subsidiary Patent Income Contract for R&D Confluence Tax LLP

8. What happens next? New UK modified nexus compliant law by no later than 30 June 2016. Legislative process will need to begin in 2015. Companies elect in to old rules by 1 July 2016 to be grandfathered until no later than 30 June 2021. What is still to be resolved? – Key practicalities of tracking and tracing, grandfathering and any exemptions still being determined – Detailed UK consultation required – Definition of IP income may change and be expanded Confluence Tax LLP