Purpose
The purpose of this paper is to discuss tax and accounting issues related to the evolution of the intellectual property box in Portugal and present a preliminary view of its impact. In 2014, Portugal adopted an Intellectual Property (IP) box, exempting from corporate taxation half of the gross revenue obtained from selling IP rights. In 2016, the country adopted a new IP regime, in line with BEPS’ recommendations, with stricter rules for exempting income. The “modified nexus approach”, recommended by the OECD, was the cornerstone of legal changes. The research questions addressed in this paper are as follows: was the Portuguese IP box, set up in 2014, internationally competitive in terms of the scope of qualifying assets and the tax rate when compared to other EU countries? Could its legal design induce potential corporate tax avoidance? Does the new IP box framework reduce avoidance opportunities and does it increase tax and accounting complexity for companies and tax auditors?
Design/methodology/approach
The methodology used in this paper is based on the legal research method combined with a case study analysis of the IP box in Portugal. The economic motivation for legal changes, the interaction between the tax authorities and the policy makers in the wake of BEPS’ recommendations, and the economic crisis that Portugal faced, influenced legislative options. A multidisciplinary approach is required to analyse the IP box modifications, and the methodology follows this line of enquiry.
Findings
The author concludes that the 2014 IP box was not competitive in terms of the scope of qualifying assets and the tax rate. However, it could be a potential tool for tax avoidance, mainly linked to transfer pricing strategies. Legal changes, introduced in 2016, by enacting stricter rules for granting tax benefits, fit a worldwide trend of restraining profit shifting opportunities linked to intangibles. The new framework clearly impacts tax and accounting complexity, for companies and tax auditors. Preliminary data, for 2014 and 2015, show a negligible impact of the IP box on corporate taxation.
Practical implications
The “modified nexus approach” is not a definitive panacea for fighting tax avoidance. Multinationals may move resources (e.g. highly specialized persons) to entities that are developing IP, curtailing the restriction associated with acquiring services from related parties. Tax authorities may fight these schemes, but face a challenging task. The grandfathering option and new accounting choices related to expense allocation are delicate issues. Not all countries adopted BEPS’ recommendations at the same time, which may impact international profit shifting activities and increase tax authorities’ costs to control them. The paper also provides preliminary and exploratory evidence that IP boxes, per se, do not suddenly raise the R&D activity of firms.
Originality/value
The analysis highlights legal, accounting and economic issues in dealing with changes in investment incentives and can or may be a useful remainder for countries in the process of setting up, or amending, IP boxes.
A Theory of Tax Avoidance -- Managerial Incentives for Tax Planning in a Multi-Task Principal-Agent Model