patent scheme
Tax & Accounting15/06/2021 3:19:00 AM

Unboxing the Australian Government’s $100 million patent scheme

Contributed by Kim O’Connell, Partner, Luke Hawthorne, Senior Associate and Shelby Koh, Law Graduate, King & Wood Mallesons

One of the key measures targeting innovation in the 2021 Federal Budget is the introduction of a “patent box scheme” worth over $100 million annually. The patent box scheme is aimed at encouraging organisations to research and develop their medical and biotechnology innovations in Australia. The goal of the scheme is to drive investment in those sectors and to ensure that innovators are filing patents for those innovations in Australia.

The scheme brings Australia in line with over 20 other countries who have introduced similar schemes, including the United Kingdom (the UK), France, Singapore and China. It is set to come into effect from July 2022 and will provide a tax concession for income from granted Australian patents that are applied for after 7:30pm on the day of the Budget announcement on Tuesday 11 May 2021.

The concession means that corporate income derived from Australian-owned medical and biotech patents will be taxed at a reduced rate of 17%, rather than the usual rates of 30%, or 25% for SMEs. The concession will only apply to income derived directly due to the patent. Ancillary income such as that from manufacturing and branding will continue to be taxed at normal corporate rates.

The worked example provided in the Budget fact sheets indicates that the concession may be proportionally applied where only part of the research and development leading to the patent occurs in Australia.

The patent box scheme complements the Federal government’s $2 billion investment in the Research and Development Tax Incentive and its precise operation will be finalised after close consultation with industry on its design. Together these measures aim to further increase the attractiveness of Australia as a jurisdiction for research and development in the medical and biotechnology sectors.

Theory and practice: how will it work, who wins and loses?

Patent boxes have been criticised in a number of respects – principally for incentivising filing patents over true innovation and increased economic contribution. However, a report from the Office of the Chief Economist in 2015 (the Report)[1] found that Australia lagged behind other developed countries in providing incentives for research and development. It is to be hoped that the introduction of the Australian patent box scheme will further level the playing field for companies choosing a location for research and development.

However, as the Report acknowledged, while “[t]he lower tax rate will ultimately increase post-tax profits of innovative firms…. only a narrow range of innovative firms are likely to benefit from the patent box regime, namely firms that hold patents and conduct R&D”[2]. Particularly in the medical and biotechnology fields, innovators in AI and other forms of technology are likely to be significant therapeutic and economic contributors, but illogically, may not benefit from the patent box’s tax incentives.

Nevertheless, if the Australian patent box scheme is well designed and positively received, it could be rolled out to other industries. The government has flagged that it plans to next examine whether a patent box is an effective way of supporting developments in clean energy.

How does this compare with competing countries?

The government has indicated that the scheme will follow the OECD guidelines on patent boxes to ensure that it meets internationally accepted standards.

As an example of schemes already in operation, the UK introduced a patent box scheme which was designed to encourage companies to keep and commercialise IP in the UK. The UK scheme permits companies to “elect in” to apply a lower rate of corporate tax (10%) to profits earned as a result of patented inventions. To be eligible to use the patent box scheme, companies must be liable to corporate tax, make a profit from exploiting patented inventions, own or have exclusively licensed-in the patents and have undertaken qualifying development on the invention claimed in the patents. Satisfying the “qualifying development” requirement means that companies must create, or significantly contribute to, the creation of the patented invention, or must perform a significant amount of activity to develop the patented invention or to develop any product or process incorporating the patented invention.

Similarly, China’s patent box regime allows income from patents and certain types of commercial know-how to qualify for a lower corporate income tax rate. Once a company has reduced its taxes by 5 million RMB (approximately AU$1 million) then further income that qualifies for the patent box is taxed at half the corporate tax rate (currently this equates to 12.5%).

China also provides a lower tax rate to companies that spend at least 3% to 6% (depending on their size) of their gross revenue on research and development have 60% of revenue from core IP (defined as inventions, utility model patents, software, copyrights, proprietary layout designs, and new plant varieties), and have 30% of their workforce with a college degree or 10% of their workforce employed in research and development or high tech occupations.

Next steps

Australian companies will have an opportunity to shape the Australian patent box scheme as the government rolls out a consultation process in the lead up to implementation of its scheme mid next year.

Source: This article was originally published on the King & Wood Mallesons website and has been reproduced with permission.

Footnotes

[1] Patent Box Polices, (2015) p. 1.

[2] Ibid. p. 14.