A report to the Australian Government, Patent Box Policies, has provided a limited and unhelpful assessment of patent box policies.
The report, which admits a “lack of economic models and empirical evidence prevent quantitative estimates”, was prepared by Gaéten de Rassenfosse for the Department of Industry, Innovation and Science's Office of the Chief Economist.
AusBiotech and others have been advocating for the Australian Innovation and Manufacturing (AIM) Incentive – a patent-box-style incentive – to keep R&D-based IP, developed and supported in Australia, to stay when it reaches commercialisation. This would enable Australia to keep the associated jobs, manufacturing, exports and economic benefits to the innovation ecosystem in our country instead of losing them to more competitive jurisdictions.
The academic research utilised in the report’s qualitative analysis is based on foreign patent box regimes prior to the “modified nexus approach” being mandated by the G20 and OECD countries. This approach would mean only R&D conducted in Australia would be eligible for the AIM Incentive and therefore renders the research out-dated and of little relevance in assessing a patent box for Australia.
The report says “there is no apparent market failure associated with R&D commercialisation, at least not of the type that a patent box policy would solve”, however it is widely accepted that Australia has a significant “market failure” in a lack of access to venture for life sciences commercialisation – as well as a number of market barriers, like a high corporate tax rate.
It is unclear why no qualitative analysis has been undertaken, or why so few quantitative indictors have been used in the assessment, especially in the context of Australia’s recent commercialisation performance and the importance of this potential program.
The country regimes evaluated in the qualitative analysis all allow preferential tax treatment under their patent boxes regarding “acquired IP”. This would not be a design feature of an Australian patent box, given the required nexus to R&D activity, and would now be in transition in other countries, since the OECD’s views were published.
The position put in the report that neighbouring countries may be pushed to adopt patent boxes, does not consider that Australia already has global competitors, many with existing tax incentive programs that they will presumably continue. Strong regional competitors such as Singapore have many attractive commercialisation features that currently substitute for a patent box (e.g. low corporate tax rate, R&D tax incentives, targeted tax holidays and grants). In this context, the suggested “fiscal race to the bottom” makes little sense.
There is no consideration of Australian-specific factors, such as the difference between the Australian tax system and other G20 countries, specifically franking credit impacts in reducing the cost of a patent box scheme in Australia.
The Report notes the level of current patenting in Australia is low and notes that additional “opportunistic” patenting would be likely to occur. If additional patenting occurs in response to a patent box, this should be considered a positive as it would place more inventions on the public record as part of the patent disclosure process, which in turn would reveal more data for researchers that would otherwise have remained a trade secret. A real potential exists that additional royalty revenues will flow to Australian companies, which has not been considered in the report’s qualitative analysis.
The proposed AIM Incentive would encourage capturing all activities in the innovation process, including research, development, commercialisation and exploitation of IP (including licensing, manufacturing and sales) in Australia. By having the AIM incentive, innovative companies engaged in R&D will have a greater incentive to reinvest any tax saving from the AIM Incentive in further R&D, employment, plant and machinery, etc., and will help ensure highly-skilled jobs are retained in, or attracted to, Australia.
CEO of AusBiotech, Dr Anna Lavelle said: “The report has many short-comings and making the argument not to implement a flawed design is obvious. No-one from industry is advocating for failure or a flawed structure.”