Scintilla – a flash, a spark, an iota. Shorthand for creativity and an indicator of inventiveness under Australian law.

Wednesday, November 13, 2013

Thinking inside the Box: the case for a Patent Box in Australia

By James Gonczi, Lawyer

With the recent change in Australia's Federal Government, Allens has been considering what ideas our new government might be coming up with. In the intellectual property space, one potentially big development is the suggestion that the Abbott Government might be considering whether to introduce a 'Patent Box' in Australia.

The so-called Patent Box isn't exactly a new idea. The United Kingdom and several other European countries have already adopted a Patent Box and even President Obama has this item on his agenda now that the Government shutdown is concluded (at least for now). The Patent Box has already been under consideration in the United States Congress. H.R 2605, a Bill to amend the Internal Revenue Code to allow a deduction for patent box profit, was introduced to Congress on 28 June 2013. Australia is definitely playing catch-up.

Given the recent attention that the Patent Box has been receiving both at home and abroad, we thought it was time for a brief introduction to the Patent Box for those who haven't heard of it and a refresher course for all the clever readers who have. We will do this by way of a Q&A where we get to make up both the questions and the answers. It's just easier this way.

Q: What is it and how does it work?

A: The Patent Box is a essentially a means of rewarding companies for their R&D work. In its European iterations it has worked by way of a reduction in the level of tax that is paid by companies on income that has been derived from patented technology.

In the UK, a company is only eligible for the Patent Box tax deductions where it is either the owner or exclusive licensee of a patented invention and where the company has undertaken 'qualifying development' on that invention. Qualifying development refers to:
  • creating, or significantly contributing to the creation of, the patented invention; or
  • performing a significant amount of activity to develop the patented invention, any product incorporating the patented invention, or any process incorporating the patented invention.
Where the ownership requirements in relation to a qualifying IP right are met by virtue of an exclusive licence being held, then it is the company holding the licence (or where relevant, the group of which it is a member) that must have performed the qualifying development.

Clearly the focus is on rewarding research and development.

Q: Doesn't Australia do this already?

A: Well, like the Patent Box, encouraging R&D isn't exactly a new idea. Many countries try to encourage research and development. Australia's current scheme for rewarding R&D is the R&D Tax Incentive. We think the Patent Box is a better idea.

Q: Why is it a better idea?

A: Because it is a reduction in the tax on profits derived from innovation as opposed to a tax offset for the cost of the innovation itself. This means that it has the potential to not only encourage R&D as an initial step, but to encourage companies to keep thinking of ways to make profit out of their patents. This can benefit Australians in general, Australian workers and companies. It's a win, win, win. We note this could work either on its own or in conjunction with the existing R&D incentive schemes.

Q: Does it work?

A: You bet it does. Earlier this year GlaxoSmithKleine Chief Executive Sir Andrew Witty was widely reported as saying that the introduction of the Patent Box had changed the way GSK looked at the UK as a location for new investments. GSK was reported as intending to make a 500 million pound investment in the IP-friendly environment created by the Patent Box.

Actually, it seems to work so well that German Finance Minister Wolfgang Schaeuble has recently complained that the Patent Box has the potential to result in unfair market conditions within the European Union, as there will be different levels of incentives within various member states. In the EU context such a concern may well be valid. In Australia, no such concern exists.

Q: When can Australia expect to see it?

A: It's unclear when we might be seeing a Patent Box in Australia, but we hope that the answer is 'soon'. A Patent Box has the potential to further encourage commercialisation of innovation in many different industries, from biotechnology/pharmaceuticals to general manufacturing. It has the potential to drive sustained and ongoing research and development in a country where the cost of labour might otherwise cause it to be lost in an increasingly competitive global economy. We think it is a great idea and we hope that the new Government does some serious inside-the-box thinking about this one.

Q: Why is it called a 'Patent Box'?

A: Um, good question. We don’t know.

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