Denham Sadler
June 20, 2019

Govt mulls patent box tax break

R&D Tax

Govt mulls patent box tax break

Lorraine Chiroiu: The AusBiotech chief says a patent box will boost R&D in Australia

The federal government is mulling the introduction of a “patent box” tax break scheme to encourage the commercialisation of research by local tech firms. But many in the sector say this will only be successful if further efforts are also made to support early-stage companies.

A patent box provides a reduction in tax on the profits that a company makes from intellectual property, with the aim to incentivise research and development and commercialisation.

The tax incentive is a popular mechanism in Europe, with different versions currently running in the United Kingdom, Ireland, Belgium, the Netherlands and Spain.

The introduction of a similar scheme in Australia has long been discussed in Australia, with the Chief Economist tasked with investigating such a plan in 2015.

Speaking at a business event in London, Treasurer Josh Frydenberg said the federal government was considering a patent box regime similar to the one running in the UK.

“We need to have a tax regime around intellectual property to attract companies and maintain their investments in Australia,” Mr Frydenberg said at the event.

“I’m happy to have a close look at what they do, because we certainly should not be only trying to protect intellectual property but also accelerate it.”

Labor has also said that it is open to a patent box scheme in Australia.

“Labor is and always has been keen to encourage innovation and investment. We will look closely at the UK experience, and are always happy to consider any constructive policy from the government,” shadow assistant treasurer Stephen Jones told InnovationAus.com.

The patent box was introduced in the UK in 2013, providing a halving of the company tax rate for profits generated from intellectual property. The company tax rate is already much lower in the UK, with the tax break bringing the rate down from 20 per cent to 10 per cent.

In 2016-17 more than 1000 companies claimed the tax relief, with $1.7 billion saved. The majority of savings by value were made by the 280 largest companies to claim the scheme.

The introduction of a similar scheme in Australia would help with the country’s often discussed commercialisation woes, but complementary support for early-stage companies is also needed, Q-CTRL chief executive and University of Sydney Quantum Control Laboratory director Michael Biercuk said.

“The government is clearly interested in supporting not only research but research commercialisation. If suitably defined, where commercialisation products or services emerging from R&D are covered without a reliance on patenting, this proposal would be a mechanism to support whole-of-life research translation,” Professor Biercuk told InnovationAus.com.

“Given it would primarily benefit larger, later-stage profitable companies, it must be coupled with strengthened support for early-stage companies accessing R&D incentives," he said.

"We know from the Chief Economist that these early-stage companies are most likely to be doing truly innovative work relative to large incumbents.”

But the focus on increasing the number of patents being filed could “quickly become a legislated own-goal”, Professor Biercuk said.

“Small and early-stage companies often focus on building proprietary capabilities and exploiting advantages in delivery, customer service and user experience rather than patent protection."

“Unfortunately patents frequently deliver their primary benefits to large multinationals with the capital and cloud to both file broadly and prosecute infringement," he said.

"Moreover, Australia currently provides an Export Market Development Grant that covers, among other things, IP filing and protection in foreign jurisdictions, so ultimately I’m not sure what the net benefit of focusing on patents would be through this new scheme.”

The news has been welcomed by AusBiotech, which has been campaigning for a patent box scheme in Australia for several years to help keep research in Australia.

AusBiotech chief executive Lorraine Chiroiu said Australia “risks being left behind” if it doesn’t introduce such a scheme.

“This would enable Australia to keep the associated jobs, manufacturing activity, exports and economic benefits in our country instead of losing them to more tax competitive jurisdictions,” Ms Chiroiu told InnovationAus.com.

“If Australia is serious about becoming a knowledge-based economy we must take steps to support innovation and make our tax regime more competitive to stem the flow of IP to more favourable tax-jurisdictions.

“Our current rate of company tax is one of the highest rates in the developed world. This, along with increasing labour costs and the loss of some of our best talent to overseas markets, has significantly impacted local Australian manufacturing and innovation industries.”

The Office of the Chief Economist released a report on patent box schemes around the world in 2015, finding that a similar version in Australia was likely to have a negative return, with a large decrease in tax revenues and not a large increase in the incentive to invest in research.

“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 and will not be tied to real economic activity,” the report found.

“Patent boxes are not a very appropriate innovation policy tool because they target the back end of the innovation process, where market failures are less likely to occur," it said.

"However, contrary to EU countries, Australia has the possibility of designing a patent box regime that links the incentive to the conduct of R&D and production of patented product in the country.”

But the report was criticised for not focusing on some of the other benefits of a patent box scheme, including the ability to keep growing tech companies in Australia and attract others to the country to develop IP.

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