With the rise of patent box regimes across the world and a push for a program to be adopted in Australia, there’s an increasing amount of media interest in the subject. While much of the coverage deals with the benefits that a patent box could provide (or at least adds to the debate), the odd piece of misinformation also pops up.

At Griffith Hack we’ve put on our myth busting goggles to analyse the claims and lay out the facts.

Myth: Patent Boxes are harmful tax erosion - the OECD says so!

In April 2016 a spokesperson for Christopher Pyne, the Minister for Industry, Innovation and Science, said “Patent boxes are often implemented as a tax competition policy without being linked to any real in-country activity. This is deemed as harmful tax erosion by the OECD.”

Over the last 2 years the OECD has set out criteria that lay the groundwork for good patent box policies. It’s true that incentives that don’t encourage substantive activity (like R&D or manufacturing) and focus only on IP holding location can erode the global tax base. But this is ultimately an issue of poor policy design.

Myth: The UK abolished its Patent Box regime because it didn’t work

Where the benefit of a patent box is linked to in-country R&D activity (typically by the OECD’s preferred ‘modified nexus’ approach), patent boxes are not harmful and are consistent with OECD guidelines.

Following the recommendations from the OECD, the UK has taken steps to modify its patent box to bring it into line. This has seen the old patent box (which didn’t strongly link benefits to in-country activity) ceasing to take new entrants from 30 June this year.

New entrants will be able to access a new UK patent box program with stronger links to in-country activity, following the 30 June deadline. The new UK patent box is alive and well!

Myth: Patent boxes don’t really boost innovation; they just create an additional tax break for big business

The primary benefit of a patent box regime to Australia would be its potential to stop innovative Australian businesses moving to countries that provide a more attractive business environment. The examples commonly used are CSL and Atlassian – smart Australian businesses that have overlooked Australia as a place to set up shop or expand.

One hurdle when making the case for a patent box regime is that it’s difficult to quantify the revenue and other societal benefits that are lost because of this business, and innovation as a metric isn’t easily measured.

Having said this, patent activity in the EU economies provides an indication of the impact of patent boxes on innovative activity. Based on recent figures, of the six largest economies in the EU, the two that have recently introduced patent box regimes saw the largest increase in European patent applications year on year. Most notably:

  • Italian patent applications were up by 9%, which reversed a four year decline; and
  • Patent applications from the UK were up by 5.7% which was the highest increase in patent applications for the UK in the last five years.

It’s important that any debate over the merits of an Australian patent box regime starts with the facts.