Germany is putting pressure on Britain to move away from a tax break for high-tech companies that it fears is undermining its own revenues in this sector.
Efforts to attract these companies to the UK by offering tax incentives for income from patents have seen early success, with several companies from Germany already relocating to take advantage.
TMF Group's head of tax Richard Asquith points to the significant increase in the number of German patents being filed in Britain as evidence of this success. He told the Financial Times that, since its introduction in April, the 10% tax rate on patent profits has helped Britain to compete with Europe's most attractive technology markets.
"Other countries such as Luxembourg and the Netherland have better patent schemes, but the UK one seems to be encouraging the biggest movement of development," Mr Asquith told the FT.
The number of patent applications filed by German businesses rose significantly in 2012 - by 27% to 471 - which the Intellectual Property Office attributes to anticipation of the tax break.
But it has brought increasing concern in Berlin, where a senior official has said that the UK risks being accused of hypocrisy if it continues to pursue greater investment in the technology sector through tax competition while also targeting avoidance.
Tax avoidance has been a major topic of international debates in the run up to the Group of Eight (G8) summit taking place in the UK on 17 and 18 June.
Leaders from Canada, France, Germany, Italy, Japan, Russia and the US will meet with UK Prime Minister David Cameron. Talks are tabled on three major issues: advancing international trade, ensuring greater levels of tax compliance, and promoting greater transparency.
UK wishes to use its G8 presidency this year to prompt unified action by the international community on tax evasion and deal with the challenges posed by avoidance schemes that concentrate profits in low-tax jurisdictions. It has also called for improvements to transparency of company ownership.
TMF Group helps global companies take the risk out of international investment. We have expert accountants, corporate secretarial and HR and payroll professionals in more than 75 countries providing outsourced compliance services so you have the local insight you need.