The modified nexus approach for IP regimes has been a hot topic of discussion among tax experts and policymakers worldwide. The agreement on this approach signifies a significant milestone in international taxation, as it seeks to ensure that profits are taxed in the countries where the value is generated.
What is the modified nexus approach?
The modified nexus approach is a methodology that countries can use to determine the portion of profits from IP rights that can be attributed to research and development activities (R&D). The approach aims to ensure that the profits generated from intellectual property are taxed in the country where the research and development activities took place.
The modified nexus approach replaces the traditional “arm`s length” principle, which was used to allocate profits between different jurisdictions. This principle relied on the hypothetical market price that two independent parties would agree to for a particular transaction. However, it has been criticized for failing to capture the true value of IP rights, which are often intangible and difficult to quantify.
How does the modified nexus approach work?
The modified nexus approach links the tax deductions available for expenses incurred in R&D to the revenue generated from the use of IP. Specifically, countries that adopt this approach allow a tax deduction equivalent to a percentage of the R&D cost incurred in developing the IP.
This percentage is determined based on the ratio of the R&D expenses to the total expenses of the IP. For example, if the R&D expenses account for 50% of the total expenses, then the percentage of the revenue that can be deducted should be 50%.
Why is the agreement on the modified nexus approach significant?
The agreement on the modified nexus approach is significant because it provides a common framework for countries to follow when taxing IP rights. This approach helps to address the issue of base erosion and profit shifting (BEPS), which refers to the practice of multinational companies shifting profits from high-tax jurisdictions to low-tax jurisdictions to reduce their tax liabilities.
The BEPS initiative was launched by the OECD in 2013 to address this issue, and the modified nexus approach is one of the key measures proposed. Since then, more than 130 countries have signed the BEPS agreement, indicating their commitment to adopt the recommended measures to prevent BEPS.
Final thoughts
The agreement on the modified nexus approach is a positive step towards achieving a fair and effective international tax system. It provides a mechanism for countries to ensure that the profits from IP rights are taxed in the country where the value is created, thus reducing the scope for BEPS.
As a professional, it is important to keep abreast of developments in international taxation to ensure that articles on this topic are well-informed and accurate. The modified nexus approach is an area that is likely to continue to generate interest, and it is essential to understand its intricacies to provide high-quality content for readers.