German 'patent box' tax plan criticized

The Association of German Industrialists, BDI, said Tuesday that the government's unilateral move would send a negative signal to potential investors.

The industry lobby group's managing director Markus Kerber said in a message the change contradicted the country's previous policy of harmonized licensing payments and could be harmful in the long run.

"The decision is a counterproductive signal for Germany as a research and development site," he said, adding that Germany could ultimately see a drop in tax income if other countries followed Germany's lead.

Chancellor Angela Merkel's cabinet is expected to approve draft legislation on Wednesday aimed at tightening rules that allow firms operating in Germany to transfer patents, licences, and market rights to tax havens where they pay little or no taxes.

Finance Minister Wolfgang Schäuble estimated that Germany can earn an additional 30 million euros $32.2 million) in taxes every year by closing the practice of "patent box" tax breaks on profits earned from patented research.

Large scale tax avoidance

"Patent boxes" offer special low interest rates for the income from patents and licences and have become a popular instrument with which countries poach innovative firms from each other.

According to a report commissioned by the European Parliament, Swedish furniture company IKEA, for example, has moved billions of euros in profits from high taxation EU countries into subsidiaries and undisclosed recipients in tax havens, paying little to no tax.

IKEA stores in high-tax areas, the report claimed, would pay a three-percent royalty fee to a sister company, Inter Ikea Group in the Netherlands, which has no taxation. In doing so, IKEA would pay taxes on just 35 percent of its actual profits in Belgium to 64 percent in France.

IKEA is not alone in using patent box tax schemes, with other big corporations like Apple, Microsoft and Starbucks having being criticized for such tax avoidance schemes, too.

Germany pushes ahead

Germany has not granted any patent box tax advantages. Income from patents and licensed products here is generally taxed, just like corporate profits, at around 30 percent. That compares with just 10 percent in Britain, five percent in the Netherlands and zero percent in Malta.

Wolfgang Schäuble has repeatedly railed against such competitive practices. So far he's relied on a pledge by G20 and OECD countries to strike an international agreement on curbing tax avoidance. But since this effort appears to be going nowhere, Germany is now pushing ahead with national regulation.

According to the business weekly Wirtschaftwoche the move could even be more lucrative than originally estimated. New restrictions on the practice, similar to those in place in Austria, could bring in an extra one billion euros a year in corporate tax revenue for Germany, the paper estimated.

uhe/mds (Reuters, dpa, BDI)