Prime Minister Turnbull, in his recent press conference, declared that the “Australian future has to be a nation that is agile, that is innovative, that is creative”. While the words “government” and “innovation” don’t often go hand in hand in one’s mind, government has an important role in supporting innovation, namely through incentives.
There are two main forms of R&D incentives that are in use around the world: tax credits and “patent boxes”. In Australia, we use tax credits to incentivise innovation and R&D at the front end. By contrast, patent boxes incentivise commercialisation of patents through lower tax rates for IP related profit. It is when R&D tax credits run out, i.e. during the commercialisation phase, that Australian IP is most vulnerable to being sold off overseas. In theory, a patent box could locate more innovation-based, high-paying technology jobs in Australia.
This article draws on a recent analysis piece1 addressing the current likelihood of the introduction of an Australian patent box, and aims to shed light on patent box schemes as well as to summarise some of the current barriers to implementation in Australia.
How would an Australian patent box scheme work?
A useful reference point for how an Australian patent box scheme might look is the existing UK system. Introduced in 2013, its aim is to “provide an additional incentive for companies in the UK to retain and commercialise existing patents and to develop new innovative patented products to encourage companies to locate the high value jobs associated with the development, manufacture and exploitation of patents”.2 The conditions are that there must be “qualifying IP” owned by “qualifying companies”.
Qualifying IP includes UK patents, EU patents or patents issued by select states in the European Economic Area, supplementary protection certificates or any plant breeders rights under Part 1 of the UK Plant Varieties Act 1997 (UK). The qualifying IP requirement prioritises high value innovation-based jobs rather than foreign capital investment. Qualifying companies must do “qualifying development” by a) creating, b) significantly contributing to creation, or else c) performing “significant…activity” for “developing the invention or any item or process incorporating the invention”. This requirement also minimises passive capital investors taking advantage of the reduced tax and boosts actual innovation.3
What is needed for Australia to implement a patent box scheme?
Any new competition-restricting regulation in Australia must follow the guiding principle of the Competition Principles Agreement (CPA) that:
Legislation…should not restrict competition unless it can be demonstrated that:
- the benefits of the restriction to the community as a whole outweigh the costs; and
- the objectives of the legislation can only be achieved by restricting competition.
A major barrier to implementation of a patent box scheme in Australia is the lack of reliable long term data on patent box nations versus non-patent box nations, particularly given that under the CPA the “demonstrated” evidence must “rely on authoritative data, both qualitative and quantitative”.4 The evidence needs to be two-fold, showing the net benefits of the scheme, as well as why such a scheme is the only path that solves the problem, over all other regulatory and non-regulatory options.
Further, short term data has its weaknesses. Studies conducted in 2010 5 showed data suggesting that patent boxes increase the number of patents but reduce overall tax revenue. However, those studies did not consider the UK system, which, unlike the European system, requires some degree of local development and is the most attractive (and most likely) to be adopted by Australia. The studies also do not look at the tax revenue Australia would receive if a patent box were not adopted. With several countries already having patent boxes, this assessment should certainly be factored into the cost-benefit analysis. Not introducing a patent box may avoid some tax revenue losses, but revenue could be lost elsewhere as a result of other countries becoming more attractive destinations to locate profit generating commercialisation activities.
A group of industry leaders, including Ausbiotech, Export Coalition of Australia, Cook Medical and Deloitte have campaigned for the introduction of a patent box for Australian industries to maintain competitiveness internationally. However, for now, we need more data on patent box schemes before new regulation can be justified.