16 November 2014

‘Patent Box’ Tax Break Prospects Plummet at G20 Meeting

Box and figureThe Australian Government looks set to abandon the sole IP-related initiative it took into last year’s federal election, with treasurer Joe Hockey reportedly all but ruling out the prospect of a ‘patent box’ tax concession being introduced in this country.

Indeed, according to coverage of this weekend’s G20 Summit taking place in Brisbane, Hockey is also pushing for other countries that currently have patent box schemes to amend their own rules to ‘ensure that they are not inappropriately used for tax avoidance’.

I think this is all very unfortunate, particularly because much of the anti-patent-box sentiment appears to be based upon gross misunderstandings (or, possibly, wilful disingenuousness) about what patent box schemes are about, and how they work.  Even the economics editor at The Age newspaper, Peter Martin, seems to be spreading the misinformation, writing that ‘patent boxes allow companies that have developed new technology overseas to register the patent in the host country in order to avoid tax in the country in which the technology was developed.’ 

However, as I explained in an earlier article, patent box schemes are designed to encourage investment in R&D within the jurisdiction where patented technology is developed, by offering a reduced tax rate on profits that can be specifically attributed to that technology.  This is not tax ‘avoidance’.  It is a tax concession that is offered on income that might not have been generated at all – or that might have been generated in another country – were it not for the incentive provided by the scheme.  Pharmaceuticals giant GlaxoSmithKline credited the introduction of a patent box concession in the UK for its decision to build its first new factory there in 40 years, and to follow up with a further 200 million pound investment in 2013.

Once Was Policy

I am a supporter of the patent box concept for Australia.  I believe that this country should, at the very least, be looking very closely at the potential benefits of introducing such a tax concession.  In the manufacturing policy that it released prior to last year’s election [PDF, 1.7MB], the present government promised a review of tax incentives for research and innovation in which it would ‘examine the potential applicability to Australia of the “patent box” model that has been implemented in a number of overseas countries.’  As recently as January this year, the (then) assistant treasurer Arthur Sinodinos was talking up the government’s intention to look at introducing a patent box incentive scheme.

Corporate Tax Avoiders Now the Bad Guys

But that was then, and this is now.  The current ‘big issue’ driving the discussion is the use of international corporate structures by multinationals to radically minimise the tax that they pay in many of the countries in which they operate, with Apple, for example, reportedly having paid only $193 million tax in Australia since 2002, despite having sold some $27 billion worth of products.  It appears that since much of the profit-shifting is based upon intellectual property licensing, patent box incentive schemes have become collateral damage in the debate, even though they have very little to do with the tax minimisation schemes themselves – as is evident from a detailed exposé of Apple’s profit-shifting arrangements published this past March by the Australian Financial Review.

Hockey first started making negative statements about the proposal for an Australian patent box scheme following the G20 Finance Ministers’ meeting in September, much to the alarm of the start-up sector which, with the biotechnology industry and other stakeholders, has been lobbying for some time for the introduction of this type of tax concession in Australia.

Is the Treasurer Really So Ignorant?

It is possible that Joe Hockey genuinely does not understand how patent box schemes operate.  He has certainly demonstrated a level of buffoonery in recent times that might be taken to suggest that he is not the sharpest tool in the shed: being caught smoking cigars with Finance Minister Mathias Cormann while on a break from finalising a harsh budget that has divided Australian society; dancing to ‘The Best Day of My Life’ in the morning before delivering said divisive budget; comparing a $7 co-payment for a GP visit to a third of a packet of cigarettes, or two beers (he later substituted coffee for beer – I am not sure what the cost is in cigars); defending an increase in fuel taxes by saying that ‘the poorest people either don’t have cars or actually don’t drive very far in many cases’; and recounting tales of ranting about council regulations limiting the number of chairs and tables allowed on the pavement outside his local pizza restaurant.

Or Is It Something Else?

I suspect, however, that the reality is more insidious that mere ignorance.  While the introduction of a patent box tax concession might benefit Australia, it could also upset some of our major trading partners that do not have a corresponding incentive scheme in place.  As Angel Gurria, secretary-general of the Organisation for Economic Co-operation and Development (OECD) stated following the G20 Finance Ministers’ meeting, patent box rules can be used to ‘attract the business into their territory’ while ‘eroding the tax base of other countries’.  Well, yes, that is right – in fact, it is one of the things that tax incentives of this kind are supposed to do!

So, despite the fact that patent box schemes have been effective in attracting new manufacturing investment in other countries, and despite the fact that Australian industry stakeholders are calling for the government to introduce a patent box scheme, it increasingly appears that the treasurer has decided to drop all further consideration of the idea in order to appease our powerful trading partners.

If so, then how pathetic is that?

Image Copyright (c) 123RF Stock Photos


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