Make in India: Cues from the patent box

There is near unanimity that India’s Make in India programme may disintegrate without a predictable tax regime. Many foreign investors use terms like “tax terrorism” to describe why they are reluctant to set up businesses in India. The Vodafone retrospective tax case is shown as an example of how unpredictable Indian taxation is. Hardnews spoke with Julian Christmas, a Taxation expert from UK to find out why the country is an attractive investment destination and whether cases like Vodafone can happen there 

Hardnews Bureau Delhi 

Tell me, why is it attractive to be investing in Great Britain?

Certainty and predictability characterize the UK system. It is a very stable and attractive legal system. Its tax system is also very simple, with relatively low rates. Incentives are there to attract certain kinds of companies to the UK, and we like to think that our legal and tax system is respected internationally. So we have that solidity and predictability that you need when you’re looking to invest. 

Doesn’t the tax structure change when there is a change in regime?

The Labour party was in power about five years ago. Since then the tax rate has been coming down. Over about ten years it has been reducing subtly, during which period there was more than one government. So, in 2006, it was 29 percent, and today it is 20 percent. Tax credit is a big part of our tax incentive system, which was introduced in 2000 and has been very steady since. And the patent boxes, I think, were actually conceived and put together by the previous Labour government, and finally implemented by the Coalition government. 

What are the features of the patent boxes?

The corporate tax rate is 20 percent. For many years we had the R&D tax credits and tax incentives to encourage companies to invest in R&D in UK, to attract R&D activities and to retain R&D jobs in UK. The patent boxes then serve as an incentive to companies to exploit their patented IPs. So the R&D process is encouraged by the R&D tax credit. The product of R&D process is IP. The patent box is there to encourage companies to retain their IPs in UK and exploit through UK companies. Hence UK is the location for exploiting IPs and selling internationally. I have this presentation this afternoon and one of the areas I cover is why the UK is not just a good location to do business in, but also a good location from which to do international business. The way the patent box works is: the corporate tax is 20 percent; the patent box will give an affected rate of 10 percent  for the exploitation of patented IPs. So it makes sense to retain IPs in UK and sell and export from here. 

What does the UK do to encourage people to locate their business in London and do business elsewhere?

It is possible to set up a company in UK and sell internationally from UK. It’s attractive to do for many reasons, and as I said I have many points to talk about on this. Now 20 percent corporate tax is lower than all of the European nations. So, selling from UK is an attractive thing to do from tax point of view. Patent box works on international sales as long as circumstances permit that certain types of sale outside the UK will also qualify patent box’s low rate of interest. There are simple things like, for withholding taxes for a UK company—for example an India parent company—it will sell, be successful, make profits: 20 percent corporation tax. No withholding tax. After the corporate tax is paid the profit is available to be distributed to the parent company. From UK to India there are no withholding taxes. In fact, from UK to anywhere, there is no withholding tax. But many of our European nations will apply withholding taxes to the dividends. So, nobody needs to pay higher corporate tax. For example, in France, Germany and elsewhere, after the profit is taxed, there are further layers of withholding taxes. So the dividend is eroded and dividend levied from the other countries will be level. So we have low taxes, and withholding taxes is a key point.  

No other countries’ tax structures are comparable to UK?

France’s corporate tax, I guess, is 29 percent Germany and France have corporate taxes just less than 30 percent. I know it tends to be their competitive strength, but corporate taxes in Europe are higher. There are some issues with the withholding taxes. That means if you are making profit in Europe then you won’t able to posture it to India.

The nature of economy has changed. There are many online companies that are doing big business. How does the UK tax system look at them?

It’s broadly the same. There is one area of complication for these online or digital companies—VAT. The structure of the VAT is most inconsistent across the whole of the year. Digital business has complicated the way VAT is applied, so a new set of rules were introduced in the beginning of this year. These apply to certain types of businesses and dictate different rules for specific transactions from the VAT perspective, since the digital arrangement is different from the old economy. But from the point of view of UK’s economy the corporate tax of 20 percent is consistent. 

Government of India has imposed retrospective tax on Vodafone. Do you think this would have been possible in the UK?

It may not have happened in UK. We do have the HMRC, our government tax organization, and it is possible that when you are establishing a business in UK, you can engage with HMRC, discuss the plans and get some idea about the taxes. So, this is before you start a business in UK. This is a special team in UK. You can engage in a proper discussion about your plans and how you will structure your business. For example, if you want to establish a carton boxes business in UK, it will be very helpful to take some indication from the HMRC about the UAD qualified for the carton boxes. So it’s a very important to engage with HMRC, to discuss your plans; they will give you some clarity about the RND tax payments and more complex issues. 

I am sure your country had to deal with issues of retrospective taxation in  past.

Yes, and those occasions will simply be put down to interpretation of old tax laws, tax returns and tax positions; at times there may be some change in interpretation or change in the tax application. While there is the possibility of retrospective taxation, I don’t think that there are any such cases as Vodafone.