Germany, UK agree to tighten tax breaks

Berlin - Germany and Britain will seek other countries' backing for a deal to ensure that tax breaks on profits generated from patented research apply only in the country where the research and innovation takes place.

Firms have been keen to relocate some units to take advantage of "patent box" tax breaks.

"Just because something is legal, does not mean it is fair in tax terms," said German Finance Minister Wolfgang Schaeuble. "Multinationals must contribute their fair share to public budgets, just like any other company."

The British Treasury and German finance ministry said their proposal was based on a principle advocated by the OECD, that tax benefits should be connected directly to local research and development spending.

The two countries were "seeking to achieve a balance between maintaining countries' ability to offer such regimes and preventing misuse of them," they said in a statement on Tuesday.

Germany has until now granted no "patent box" tax advantages and income from patents and licensed products is generally taxed, like corporate profits, at around 30%.

That compares with a rate of around 10% in Britain based on patented research. Countries such as Cyprus and the Netherlands have similar tax breaks. Germany had come under pressure from lobby groups to either introduce its own breaks or ensure a level playing field internationally.

"Preferential tax treatment of intellectual property must be dependent on substantial economic activity," said Schaeuble, adding: "More and more countries are speaking out against allowing too much leeway for large multinationals to minimise their taxes."

British Chancellor George Osborne said the deal would protect research while countering aggressive tax avoidance.

Britain and Germany will present their model to the Organisation for Economic Co-Operation and Development's Forum on Harmful Tax Practices on November 17-19, and seek approval by the wider OECD and G20 countries at its meeting next January.

"Today's announcement ...seeks to place the United Kingdom in the 'good tax citizen' camp, even though it does have a negative effect on our tax competitiveness," said Jonathan Riley, UK head of tax at Grant Thornton advisory services.