Taxing Intellectual Property: CFC rules and the Patent Box 3 March Group Finance Controllers Functions Insurance Taxation Treasury

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1 Taxing Intellectual Property: CFC rules and the Patent Box 3 March 2011 Group Finance Controllers Functions Insurance Taxation Treasury

2 Carrot and Stick Mobility of IP AZ has only 3% of revenues but around 33% of its profit in the UK Geographic footprint rapidly changing Market access requires investment UK must compete Patent box is significant step forward CFC for IP is a counter balance to the incentive for patent based industries CFC affects all IP

3 Context of current PB proposal Deficit and 4 year cuts in public spending & need for private sector growth Ring fenced 4.6bn expenditure on science skills base Dyson report on innovation (supporting R&D credits) Principles of CT reform: Low rate but maintain base (competitive regime 5 other patent boxes in EU and more on the way); stability; aligned with modern business practice; less complexity; level playing field Patent box will encourage : High value jobs and complementary activities R&D Manufacturing; & Enhance UK competitiveness to sustain world leader status in IP IFS view Other IP driven companies Brands Software CFC reform: Targeted rules for offshore IP companies that pose risk to UK tax base

4 Proposal on the table from coalition government ( very high level ) IP lifecycle of creation & development by R&D credits; commercialisation by the patent box Optional by patent first commercialised after 29 November % tax rate applied to relevant profits from 1 April 2013 Restricted to profits from patents strongest link to R&D Cost of 1.1bn but difficult to quantify given incomplete design and variation in behavioural response no upsides built in Royalty and embedded income Formula preferred to transfer price for goods under OECD Net income after associated expenses including pre-commercialisation expenses (tracked for claw back) Not to encourage passive IP holding or avoidance Cap net income to ongoing UK R&D or associated manufacturing activity 4 Title of presentation 00 Month Year (Go Header & Footer to edit this text)

5 Definition of Patent : Patents, SPC, Orphan Status and Exclusivity Patent = 20 year term EP Compound Patent + SPC = up to 15 years from first EEA MA US Compound Patent + PTE = up to 14 years from US approval SPC PTE 6m 6m Data exclusivity 8 years + 2 yrs Mkting Excl +1 yr Orphan: 10 year mkting excl +2 yr Patent Filing Date First MA in EEA Patent Expiry Compound SPC expiry SPC Extension for PIP Expiry Confidential

6 Definition of net profits subject to 10% Optional by patent first commercialised after 29 November 2010 so everything in development is in today subject to an election Royalty and embedded patent income Estimate of net margin on average pharmaceutical (hospital, personalised care, primary care?) Formula by industry sector? OECD arm s length profits transfer price driven? Carve out for manufacturing and commercialisation? Deferred tax liability estimated on successful products? Election in 2 years after commercialisation 6 Title of presentation 00 Month Year (Go Header & Footer to edit this text)

7 Net income and claw back Deduction of pre-commercialisation costs Immediate P/L tax hit on day one? Cash hit spread over commercial life of compound once elected in Capped at income on cumulative basis Deferred tax liability estimated on successful products? 7 Title of presentation 00 Month Year (Go Header & Footer to edit this text)

8 CFC for Intellectual Property Clean sheet of paper Avoid previous complexity Tackle artificial diversion of profits from UK Draft interims highlight the difficulties: Fixed % of gross income IP with UK connection / UK effective management Substance/threshold issue on MNC context Global R&D function / decision making etc. Care needed not to discourage UK R&D activity in order to fulfil substance thresholds UK to tax fair share: do transfer pricing / exit rules deliver this anyway? 8 Title of presentation 00 Month Year (Go Header & Footer to edit this text)

9 CFC for Intellectual Property Filter out the good / low risk risk assessment IP transfers from UK in last [10] years Significant continuing UK activity Offshore IP investment (passive) companies Identify excessive profits Proportional approach Funding ratio for IP investment companies 9 Title of presentation 00 Month Year (Go Header & Footer to edit this text)

10 Summary IP reform in the UK is a real opportunity to support growth strategy Next phase of design is critical New process for consultation, work groups, draft legislation well in advance should be helpful