The Australian government has confirmed its intention to consider so-called ‘patent box’ tax rules to encourage innovation and investment in manufacturing.
What is a patent box?
While the rules can be quite complex, the principle behind a patent box (the name is derived from the box provided on tax forms for companies to claim the benefit) is fairly simple: if a company invests in developing, patenting and commercialising unique intellectual property (IP), any profit which can be attributed specifically to the patented IP is eligible for a lower tax rate.
For example, a unique patented product feature may enable a manufacturer to sell the product at a premium price, or a patented process improvement may reduce the cost of manufacture. In either case, any resulting increase in profit margin may be eligible for the reduced tax rate under a patent box scheme.
Who already has a patent box?
The idea of a patent box incentive is not new. Other countries that have introduced patent box regimes in recent years include the UK, the Netherlands, Belgium, France, Ireland, Spain, Luxembourg, Switzerland and China. The reduced tax rates on income attributable to patented IP vary between countries, but are typically between 5% and 15%. Even the US has been contemplating a patent box scheme, with proposed legislation (the Manufacturing Innovation in America Act of 2013) introduced into the US House of Representatives on 28 June 2013.
Do patent box schemes encourage investment?
Patent box benefits do not apply only to locally-owned and operated companies, but can be accessed by foreign companies which engage in eligible activities (and pay tax) in the countries in question. Furthermore, depending upon the specific eligibility rules adopted, reduced tax rates need not necessarily be limited to income derived under the protection of domestic patents, but will also apply to income earned on foreign patent rights in appropriate circumstances. This means that international companies may be encouraged to invest in new research, development and manufacturing facilities in countries where a patent box incentive exists.
For example, when the UK government announced in 2012 that it would be introducing a patent box scheme, global pharmaceutical manufacturer GlaxoSmithKline (GSK) announced that it would invest 500 million pounds to build its first new manufacturing plant in 40 years, and expand some of its existing activities, in the UK, stating:
‘The introduction of the patent box has transformed the way in which we view the UK as a location for new investments, ensuring that the medicines of the future will not only be discovered, but can also continue to be made here in Britain.’
In December last year, GSK announced a further 200 million pound investment, again citing the patent box scheme.
The merits of introducing a patent box scheme in Australia will be considered in the course of a government review of research and development to be conducted later this year. The review, and consideration of patent box tax incentives, was part of the manufacturing policy which the current government took into the election last year.