In recent weeks it has appeared increasingly likely that the Australian government will introduce something similar to the UK Patent Box system to provide tax incentives to companies that exploit Australian innovation in Australia. The UK system was introduced on 1 April 2013 and early reports are very encouraging. While there are clearly differences between Australia and the United Kingdom, there are enough similarities to hope that tax incentives for innovators will stimulate the innovation economy in Australia. After many years of political discussion about the importance of building the innovation economy it is pleasing to hear proposals for specific action.
Some commentators suggest that Patent Box rules could be introduced as part of the May budget, but this seems optimistic. It is likely that further analysis will be called for, particularly in respect of the difference in market size between the UK and Australia and other factors. For instance, the Patent Box may be working for the UK because of the open access to the European community, whereas Australian innovators do not have the same easy access to foreign markets. In fact, the high Australian dollar has made life very tough for the Australian manufacturing sector. A tax break for innovators would go some way to producing the sought-after ‘level playing field’.
What is Patent Box?
The Patent Box is a UK tax incentive designed to encourage companies to exploit their patents by manufacturing or licensing them within the UK. It works by reducing the UK tax paid on the resultant income; specifically the Patent Box allows a 10% tax rate on profits derived from any products that incorporate patented technology (as opposed to the usual 23% taxation rate).
HMRC provides a formula for calculating the subtraction from a company’s Corporate Tax profits. This process includes:
- Calculating qualifying income – only revenue derived from selling patented products, licensing these products out or selling patent rights, and income from infringements or damages counts;
- calculating the profit generated from qualifying income then deducting routine profit made from routine business activities and the part of the profits derived from the company’s brand and marketing;
- deploying a four-term formula to calculate the final corporate tax deduction.
There is no guarantee that an Australian system will follow a similar process.
A coalition of industry leaders including trade bodies such as AusBiotech and the Export Coalition of Australia, along with companies such as Cook Medical and Deloitte have led a campaign to introduce a specific set of patent box proposals that they call ‘The Australian Innovation and Manufacturing Incentive’ (the AIM Incentive). The campaign is in active discussions with government officials and is likely to have some influence in the creation of any new system. Commentators have discussed both the UK model, and a simpler system involving a blanket 2% rebate of a company’s total IP-derived gross income to offset against its total company tax for that financial year. The campaign has come out in favour of the UK model, and this is the approach now being put forward to the Government. Though the campaign has said that ‘numerous design aspects could be adapted to develop the Australian model, that would fit appropriately within Australia’s legislative and economic parameters’, some of the notable features that might be implied by the UK model include:
- the incentive only apply to tax depreciable IP assets such as patents, copyrights, registered designs etc held in Australia;
- the incentive require the manufacturing or commercialisation be undertaken in Australia; and;
- the underlying R&D need not have taken place in Australia
There are clearly some differing viewpoints however. One of the main supporters of Patent Box in Australia is Barry Thomas, the Managing Director of the Australian arm of US-based Cook Medical. Mr Thomas is reported as saying, “As well as a 10 per cent rate on qualifying profits, it will include “know-how” in its definition of intellectual property”. Adding know-how would bring a degree of complexity that may add to the cost of the system without a commensurate benefit. Building a case that profits are derived from a patented technology would seem more straightforward than trying to build a similar case in respect of less well-defined know-how.
There is no guarantee that the Australian system will be the same as that in the UK, or as that proposed in the AIM Incentive, but the existing complexity of the Australian tax system may prevent any Australian Patent Box system being simpler than that in other countries.
Will it happen?
The UK legislation has come under attack from Germany which has complained to the European Commission that the Patent Box is a harmful tax practice. This is an interesting development given that other EU countries (Netherlands, Belgium, France, Ireland, Spain, Luxembourg) have similar legislation. It is far from certain that the Commission will be able to force much in the way of change to the UK system. The UK Government is adamant that it does not breach European rules. However, perhaps encouragement should be taken from German opposition as indicative that there must be some competitive advantage in the Patent Box regime.
It is also encouraging that the current Australian government went into the last election with a manufacturing policy that included consideration of a Patent Box system. The concept is expected to be part of a review into research and development scheduled to happen later this year, and indeed the Australian Assistant Treasurer Arthur Sinodinos confirmed in January that the government will consider the concept.
On the other hand, it is surprising that Holden, Ford and Toyota (all companies that hold Australian patents directly or through associated companies) would depart Australia if a 10% tax rate was on offer. By contrast, when the Patent Box legislation was introduced in the UK it reportedly was sufficient encouragement for GlaxoSmithKline to invest an additional $800 million and build its first new UK plant in 40 years.
One thing that is almost certain, if it is going to happen it is not going to happen tomorrow. It took some years for the system to be introduced in the United Kingdom and will likely take at least as long in Australia.
What can I do?
Though it is not always easily apparent, governments do respond to pressure from the electorate and the business community. If you support the idea of tax incentives for the Australian manufacturing industry the best way to make it happen is to tell your local federal politician that you support Patent Box legislation. If you are more energetic you could also write an encouraging ‘letter to the editor’ of relevant publications, like the Financial Review.
Another effective way to influence the decision will be to make a submission to the R&D review expected later in the year. We will be notifying our readers when there is an opportunity to make submissions.