Australia is a world leader in innovation, with businesses investing heavily in Research & Development (R&D) activities. However, currently our businesses lack the financial support and incentives to locally commercialise the outcomes of these R&D activities. To bridge this gap between creation of intellectual property (IP) and commercialisation, Australia needs to consider the implementation of a patent box tax system.
What is the Patent Box Tax System?
The patent box initiative is essentially a tax incentive in the form of a reduced company tax rate applied to profits made on the commercialisation of patents. Under this system, companies with unique IP subject to patent protection are eligible to receive reduced tax rates of between 5-15% on profits that are attributable specifically to this IP and it may just be the missing element needed to retain home-grown IP in Australia.
The currently available R&D tax incentive program allows businesses to receive up to a 45% tax offset on the costs associated with undertaking R&D activities. Complementary to this program, the patent box system is the progressive next step aimed at retaining the outcomes of this R&D locally, rather than see it sold off overseas.
Currently, the patent box tax system is in place across 7 different countries with France and Hungary the first to get on board in 2001 and 2003 respectively, followed more recently by the UK in 2013. Since the introduction of the patent box tax system, these countries have seen a significant increase in retention rates of their local IP and associated patents.
In the UK, companies can elect to pay as little as 10% company tax on all profits made from the commercialisation of eligible patents and claiming the patent box tax does not affect an entities R&D tax incentive claim. Unlike the R&D tax incentive however, the UK’s patent box model does not offer any financial benefit to companies that are in losses.
Recently however, the UK has bent to pressure from Germany to limit the accessibility of their patent box tax benefit citing the negative impact on the economy of those European Union (EU) countries that do not have a patent box tax system as a major consideration. The UK has now watered down their patent box tax model so that companies can only claim this benefit only if the R&D behind the patents generated is also conducted within the UK. This is aimed at reducing any tax avoidance where large multinationals cannot move their IP to the UK for a tax break without moving their entire R&D operations across too.
The implementation and ultimate effect of the patent box tax model varies between each country and table 1 below provides a brief overview of the different patent box (or similar) systems that are currently in effect across the EU.
Click here to view table.
Status in Australia
The current Australian government included the consideration of the patent box system in their pre-election policy to “Boost the Competitiveness of Australian Manufacturing” and the Australian Assistant Treasurer, Arthur Sinodinos, confirmed in January 2014 that the government will consider this system. In addition to the support shown by the current government, the Australian Innovation and Manufacturing Incentive (AIM) campaign, being led by industry bodies such as AusBiotech and Export Council of Australia, are actively campaigning to have a patent box tax realised in Australia.
Given the variation between current models in place worldwide, there is no guarantee as to how Australia will choose to implement this tax model, if we do so at all. There are a range of issues and key considerations that must be considered in designing an Australian patent box tax model such as defining what types of IP will qualify, how that IP related income will be taxed and how to combat tax avoidance so international alliances and diplomacy is upheld.
The patent box tax system may give local innovators the leg-up they need to commercialise their IP on home soil whilst also encouraging multinational companies to innovate and invest within Australia. With the US introducing a bill to parliament in 2012 for the consideration of a patent box model with an effective tax rate of 10% on qualifying income, Australia must now seriously consider getting on board if we want to remain competitive. As it stands however, there is only one certainty and that is, the consideration and possible implementation of a patent box tax model will likely take years until our businesses, and the economy, start to reap the benefits.