I have written about patent box schemes before (incidentally, the name comes from the box provided on tax forms for companies to claim the benefit). Such programs, which provide reduced tax rates (typically between 5% and 15%) on income attributable to patented IP, have been introduced in a number of countries, including the UK, the Netherlands, Belgium, France, Ireland, Spain, Luxembourg, Switzerland and China.
In the United States the Manufacturing Innovation in America Act of 2013 (HR 2605), which would provide for a patent box tax reduction, was introduced in the House of Representatives on 28 June 2013, and is currently before a congressional committee. (I note, however, that GovTrack.us gives the legislation only a 1% chance of getting past committee, and a 0% chance of being enacted!)
Potential patent box rules will be proposed by AusBiotech and the Export Council of Australia, and will considered as part of a planned government review of research and development later this year.
I am pleased to see that a review that includes consideration of a patent box scheme will be going ahead, and I am hopeful that it will report favourably on the proposal. I am in favour of a patent box tax reduction in Australia for two reasons:
- I believe that it provides the right incentive for commercial innovation, by rewarding not only investment in R&D (as existing grant and tax relief programs do), but more specifically R&D which results in protectable intellectual property which is then actually protected and successfully commercialised; and
- with a number of other developed economies providing patent box tax incentives, Australia places itself at a competitive disadvantage as a location for conducting research, development and manufacturing if it does not do likewise.
Australia’s Mixed History of InnovationWith the past weekend having marked the passage of Australia’s national day, it is an apt time to consider the country’s record of innovation. Interestingly, Fairfax Media outlets ran not one, but two, separate features on Australian inventions: Don’t Forget the Ingenuity and What Will we Think of Next.
Between them, these two articles highlight the following Australian contributions to the world: penicillin; polymer banknotes; HPV vaccine Gardasil, the bionic ear; Wi-Fi technology; the Relenza flu drug; the ResMed sleep apnoea treatment device; the wine cask; the KeepCup; the power board; Google Maps; the Hot Spot system for visually detecting an ‘edge’ in cricket; the Fairlight music synthesiser; the black box flight recorder; the car baby capsule; Aeroguard insect repellent spray; the Hill Hoist rotary clothes line; the car-based utility vehicle (‘ute’); and the paper notepad.
However, a number of these items were included on both lists, some would be better described as having an Australian connection or contribution rather than ‘being’ Australian, and one of the articles includes some ring-ins that were not invented in Australia, but which we have culturally ‘adopted’ (ugg boots and the portable cooler popularly known by the Australian brand name Esky) or which really cannot be counted as ‘inventions’ (the beach house and the feature film). Some are widely recognised as missed opportunities – the inventor of the power board, Frank Bannigan, has been reported as saying that the failure to patent the product has probably resulted in the loss of millions of dollars in royalties alone.
Australia Needs to Step-Up on InnovationWhile many important innovations have come out of Australia over the years, it has to be said that if we cannot even fill two feature articles with really well-known and significant home-grown inventions, we have some work ahead of us. Thomas Edison no doubt had days when he had more good ideas than this before he had even sat down to breakfast!
This paucity of recognised inventions is not the result of any lack of ingenuity, intelligence or education – it is well-recognised that there is no shortage of these qualities in Australia. In my line of work I meet with smart, innovative people all the time, and I can tell you that our quiet, leafy suburbs are full of them!
The bigger problem is a failure to follow-through. Innovation is process, and invention is just one of the early steps. Turning an idea into a successful commercial product requires time, money and commitment, and Australia has just not embraced these steps in the process in the way that, say, the US has over the course of its history. The reasons for this are no doubt complex and deep-seated within the culture, and no single magic bullet exists to change everything overnight. But it is the role of government to ask ‘what can we do, within reason, to assist Australian innovators in becoming successful commercialisers?’
I happen to believe that patent box tax incentives are one thing the government can usefully provide.
It is interesting to note the way in which individuals and companies in the US embrace the patent system in a way that their Australian counterparts simply do not. US Patent Office statistics for 2013 indicate that around 164,000 patents were obtained by US entities, while fewer than 2,500 were issued to Australian applicants. That is around five times as many US patents per capita out of the US as compared with Australia. You might argue that this makes sense, considering that the US applicants actually live and operate in their own home market, except that when it comes to innovative new products, the Australian market is itself dominated by imports, when what we really need to do is to grow exports. And while US applicants still account for around 50% of all US patent filings, in Australia only around 15% of standard patent applications are filed by local entities.
Conclusion – In Support of a Patent Box for AustraliaWhile it is obviously impossible to assert a cause-and-effect relationship between inventiveness, patent filings, and commercial success, these things are undoubtedly correlated, and the US has historically excelled at all of them. The Australian government could therefore, in my opinion, do a lot worse than to provide Australian companies with a financial incentive to patent their inventions (preferably internationally, as well as locally), and to commercialise those patented technologies.
That is exactly what a patent box scheme does. A reduced rate of tax is paid specifically on those profits that can be attributed to the presence of one or more patented inventions in a product. Thus to obtain the benefit, a company has to do two things – it has to patent its inventions, and it has to successfully commercialise the patented technologies. Furthermore, the inventions cannot be trivial, in the sense that a tax reduction will only be obtained if the market is willing to deliver higher profits to the innovator on the basis of the patented features of the product.
Of course, it has to be said that a scheme which encourages companies to apply to patents will also be a good thing for patent attorneys! But, setting aside pure self-interest for a second, that is surely something else that would be beneficial for Australia, which also needs to develop and maintain world-class service industries supported by a base of local economic activity.
So, what do you think? Is a patent box tax scheme appropriate for Australia? And if so, what should be its parameters? Let me know in the comments.
Image Copyright (c) 123RF Stock Photos