The Revised Case of IP Regimes Under the GloBE Rules: A Canadian Perspective

Abstract

After action 5 of the base erosion and profit shifting (BEPS) project identified intellectual property (IP) regimes as harmful, the Organisation for Economic Co-operation and Development (OECD) proceeded to recommend that favourable tax treatment be available only under a nexus approach. More than 25 countries now offer a form of IP regime. The introduction of the global minimum tax may limit the effectiveness of IP regimes. The impact of this tax will vary with the circumstances, however. A comprehensive examination of the optimal alignment of innovation tax incentives for multinational enterprises (MNEs) must be undertaken under the GloBE rules. In this paper, the authors begin by providing an overview of the global context of IP regime adoption, and they summarize some research findings with respect to the effectiveness of this type of preferential tax regime in achieving the objectives set by governments. Next, they present examples to illustrate, in simple terms, some of the interactions that must be considered when these regimes are being designed in a Canadian context. From the MNEs' perspective, the impact of the interaction between the GloBE rules and research and development (R & D) incentives will depend on, among other things, (1) the location of the IP income, tangible assets, and R & D activities; (2) the proportion of IP income; and (3) the possibility of leveraging the corporate structure. From a tax policy perspective, the introduction of the GloBE rules will in some cases not alter the suitability of an IP-preferential regime when the effective tax rate remains above 15 percent. When the GloBE rules apply, however, the characteristics of the tax regime—for example, IP regime tax rates, R & D incentive mechanisms, and (most of all) the additive effect of the measures (federal plus provincial measures, and R & D credits plus IP deductions)—will alter the results. From the perspective of tax competition, the opportunity to adopt an IP regime also depends on the perceived risks of losing or deterring R & D activities now that IP regimes are related to local R & D activities and are widespread. Finally, the federal-provincial context complicates the design and the deployment of a tax policy that is aimed at stimulating innovation and that will require some form of negotiation, if not cooperation, with the implementation of a global minimum tax.