Treasurer, Josh Frydenberg, recently indicated before a business audience in the UK that the Australian government was considering implementing a patent box tax scheme much like tax schemes adopted by other jurisdictions, most notably, the UK, France, Ireland, Switzerland, the BeNeLux countries and China. While implementation of a patent box tax scheme in Australia is likely to be several years away, it is comforting for owners and licensees of Australian patents to know that there has at least been some discussion around this topic at a high level.
Mr. Frydenberg did not elaborate on how far these discussions have progressed, but the fact that the government is considering implementing such a tax scheme represents a remarkable turnaround from their previous position, which was based on the Patent box policies report released by the Office of the Chief Economist (OCE) back in November 2015.
In that report, the OCE stated that:
- The implementation of a patent box policy will certainly increase the number of patent applications filed at IP Australia. Indeed the propensity to patent of Australian firms is low by international standards. However, most of these additional patent applications are likely to be opportunistic (i.e., inventions that would previously have been kept secret will be patented) and will not be tied to real economic activity (i.e., the risk is high that R&D leading to these patent applications is performed abroad).
- The most important cost associated with the implementation of a patent box regime is a fall in tax revenues collected from innovative companies. Since the fall is likely to exceed revenues collected from (re)allocation of IP income to Australia, the overall return of a patent box regime is likely to be negative.
Notably, the OCE felt that there was insufficient theoretical or empirical data arising from the patent box tax schemes in some of the jurisdictions listed above to support a claim that these schemes have induced more innovation in these jurisdictions.
As many will agree, there is an overwhelming need for Australian businesses to retain innovation and manufacturing within Australia, as by doing so, it is thought that this will encourage investment which will boost the local economy. Many believe that introducing a patent box tax scheme into Australia may go some way to help achieve this.
What is a Patent box tax scheme?
In essence, a patent box tax scheme allows the rate of company tax levied on income generated from qualifying patents to be effectively reduced. This would mean that an owner or licensee of a granted patent could obtain tax relief at a significantly reduced rate when compared to the normal company tax rates in the country within which the patentable invention is to be worked.
It remains to be seen what the government would consider to be a viable tax rate to be applied to profits generated from qualifying patents, but if it is to be anything like the rate adopted in the UK, then patent owners and licensees could expect to see a significant reduction in the company tax rate.
As business owners will know, the company tax rate in Australia varies between 27.5% and 30%, and so a potential halving of this tax rate similar to the UK would certainly be an attractive proposition, and one that may go some way to encourage owners and licensees to work their patentable invention onshore rather than seeking out more innovation-friendly jurisdictions.
Qualifying Intellectual Property
If a patent box tax scheme is ever introduced into Australia, it is likely that only patents that have been substantively examined by the Australian Patent Office would qualify for the lower company tax rate. Such qualifying patents would certainly include granted Australian standard patents. However, it is debatable whether the government would consider Australia’s second tier “innovation” patent as qualifying, given that the OCE elected to exclude this patent type from its conclusion in the Patent box policies report. In any case, even if certified innovation patents did fall under the guise of a qualifying patent, it is unlikely that this patent type will even be in existence by the time a patent box tax scheme is introduced, given the government’s recent approval of the Productivity Commission’s recommendation to abolish the innovation patent system.