Australia’s new treasurer Jim Chalmers says his top priorities include boosting productivity and business investment.
If so, she would be wise not to follow in the footsteps of her predecessor Josh Frydenberg, who tried for more than a year to introduce Australia’s first so-called patent box before the law lapsed without a vote. was.
First introduced in Ireland in the early 1970s, and later adopted in countries such as France, Spain, China and the United Kingdom, patent boxes are said to derive their name from a box on tax forms. which companies tick if their income is derived from intellectual property, which is taxed at a discounted rate.
The theory is that if such income is taxed less, international corporations will do more of their research and development in Australia.
When announced in the 2021 budget, the exemption was to be limited to income from patents on medical and biological technologies, although (even before the bill became law) the 2022 budget expanded it to agriculture and low-emission technologies. announced plans to
Income derived directly from patents in these areas was to be taxed only at 17% instead of the current company tax rate of 30%.
premature suspicion
Suspicions were expressed ahead of time. In 2015 the Industry Department’s Office of the Chief Economist stated that a patent box tax break would certainly increase the number of patent applications filed, with most additions “likely to be opportunistic” (filed on inventions that would have occurred without a patent). )
The lost tax was unlikely to be offset by any additional patent fees collected.
And there was a broad point of advice. Rewarding investors well after risky research was done was unlikely to do much to encourage such research.
Research and development tax credits, on the other hand, provide a tax break when research is funded, creating a $1.90 tax loss for each dollar of research, according to an Australian study.
Read more: ‘Patent boxes’ are said to fuel innovation. the evidence says they don’t
Supporters of the concept point to Australian biotech company CSL Ltd, which in 2014 set up a new plant in Switzerland instead of Australia because Switzerland had the patent box and Australia did not.
Critics agree that patent income is highly mobile, meaning it can be easily separated from actual inventive activity across borders.
One study found that 40% of multinational profits were transferred from one location to another on a tax basis, not where the profit was made.
Read more: Artificial ‘inventors’ are pushing patent law to its limits
Another study noted that businesses can obtain tax exemptions by obtaining eligible patents for patent box treatments without conducting patentable research.
A review of the UK plan, published in November 2021, identified “abuse and boundary-pushing” and made a number of recommendations designed to refocus it on activity that is actually taking place within the UK.
Tinkering, Not Transformation
Information Sheet, 2021 Budget
The plan that Frydenberg put forward contained safeguards.
This budget night was to be limited to income from patents issued after 2021, which meant (at least earlier) it would be limited to income from new patents.
Licensees of the patent would not be eligible, only those firms which themselves had the patent.
And, where patents were filed overseas, they had to be owned in Australia, and the underlying research had to be in Australia.
Labor has given no guarantee that it will go ahead with the plan announced in the last two budgets and has yet to become law.
There are reasons why this should not happen. Australia’s really big productivity gains in the 1990s and early 2000s were more to improve or replace vulnerable industries than patents.
Australia is on the verge of another transformation as a low carbon energy producer and exporter. This is where our focus should be instead of tinkering with tax support for innovations, which may be unintentional.
