CLARITY or chaos? Supporters of the Base Erosion and Profit-Shifting (BEPS) project, being worked on by the OECD, argue that it will bind multinationals to a consistent set of global tax rules, providing them with less licence than they now have to short-change governments through artful use of loopholes in national laws. Sceptics worry that it could only lead to chaos if countries adopt the new guidelines to differing degrees, or if some governments conclude they are too soft, and take unilateral action to stop tax revenue on profits being siphoned abroad.

With two months to go before the club of rich and middle-income countries presents its plan to the G20 for approval, much of its detail remains unclear. But no one doubts that, with so many clashing national interests at stake, there are limits to what can be achieved. Discord has been evident lately, even among allies: in June a US Treasury official accused Britain and Australia of undermining international agreement by “going their own way”. One beef is over Britain’s new “diverted profits” tax, which imposes a levy on profits routed to tax havens through “contrived arrangements”.

The BEPS negotiators have paid special attention to the vast “intangible” assets that multinationals hold these days: brands, copyrights, patents and so on. Much of their profit-shifting to cut tax bills, and many of the tax breaks that governments offer, relate to such intellectual property (IP) and its accompanying royalties.

IP-related tax benefits are not about to disappear. In fact, BEPS will help to regularise some of them, albeit in diluted form. Perversely, this is encouraging countries that previously shunned them to give them a try. Take the “patent box”, a scheme by which companies pay a lower tax rate on profits from IP that was developed in the country in question. Britain’s patent box, introduced in 2013, cuts the tax rate to 10%, half the main corporate rate, on profits from qualifying IP. Ireland plans to introduce one that matches the Netherlands’ 5% rate (see chart). Last month a committee of America’s House of Representatives launched proposals for an “innovation box” with a tax rate of around 10%.

The aim of patent boxes is to encourage firms to innovate. But Germany, among other doubters, argues that they are a beggar-thy-neighbour policy, whose result is that R&D spending, along with the profits booked to it, is simply shifted between jurisdictions, rather than being increased overall. Britain and other box-offerers have ceded some ground during the BEPS talks. An Anglo-German agreement, subsequently blessed by the OECD, advocates a “modified nexus” approach. In essence this is a set of criteria which seek to ensure that IP tax benefits are more closely linked to the location of related economic activity, and to where the patent was developed.

But it comes with some concessions from the other side. Companies will be allowed to pay a reduced tax rate even on IP that they have bought, or whose development they outsourced. Corporate-tax departments will surely do their best to stretch the definitions of these to their advantage. Existing patent-box regimes may be allowed to remain until 2021. Even once the new regime comes in, there are doubts about its effectiveness. Not only might it prove to be riddled with loopholes, it could also be a recipe for sweetheart deals between national treasuries and favoured industries, since it appears that the tracking of R&D spending by companies will be overseen by the very countries offering the breaks, says Alex Cobham, an economist with the Tax Justice Network, an NGO.

With patent boxes set to survive, countries are falling over each other to adopt them, according to Ajay Gupta, who writes about global tax trends. Switzerland could be next. Mr Gupta sees it as “a race that will surely end with multinational enterprises walking away with the top prize.” Martin Sullivan, a commentator for Tax Notes, every diligent accountant’s bedtime reading, writes that what little evidence there is on the impact of patent boxes suggests that they do little or nothing to boost innovation. They may increase the number of patents being filed, but in most cases this would “just be legal manoeuvring without any corresponding increase in the stuff we really want: scientists doing research and inventors inventing.” A European Commission working paper earlier this year reached the same conclusion.

Although critics fear BEPS will be too soft on multinationals, there is much for firms to worry about. Their greatest fear is that if the proposals prompt some countries to take unilateral action, it could lead to the return of double taxation—multiple countries claiming tax on the same dollop of profit. This was a risk firms often ran before double taxation was abolished under various treaties. They can, however, take comfort from the way that governments are increasingly aiming their punches at each other. As Richard Hay, a tax lawyer with Stikeman Elliott, puts it: “BEPS started out as a plan to squeeze more tax out of big companies, but it has morphed into a competition between countries over revenue allocation.”

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