Following on from this week’s budget announcement about a patent box system, we examine how this system will be applied and the effects on Australian R&D.
In our September 2019 article we posed the question Is Australia Ready for a Patent Box? After considering the outcome of the UK patent box regime, we concluded that the introduction of a patent box in Australia would align with the federal government’s economic imperatives to encourage innovation. But then the pandemic hit in 2020 resulting in a rapid realignment of government action with the 2020 budget very much focussed on dealing with the country’s economic shutdown.
Fast forward to May 2021 and we see a government budget approaching economic recovery with renewed vigour, including support for innovation particularly in life sciences. A component of this support is the creation of an Australian patent box system.
According to the government paper Tax Incentives to Support the Recovery, from 1 July 2022 the patent box will tax income that is derived from Australian medical and biotech patents at a 17% effective concessional corporate tax rate. Normally corporate income is taxed at 30% or 25% for small and medium companies.
To qualify, medical and biotech patent applications must have been applied for after 11 May 2021. Only patents granted on these applications will be eligible. It is an objective of the patent box to encourage businesses to undertake their R&D in Australia and ensure that patents are granted in Australia as a result of the R&D.
In designing the patent box system, the government has indicated that the legislative framework will follow the OECD’s guidelines on patent boxes to ensure the Australian patent box meets internationally accepted standards. In particular, the FHTP (Forum on Harmful Tax Practices) standard BEPS Action 5 (Base Erosion and Profit Shifting) set by the OECD.
For guidance, the government paper provides an example of how the patent box would be applied:
Watson Medical Technologies makes $180 million in net income from selling a product that contains knowhow covered by a single patent. $175 million relates to the patent and $5 million relates to other attributes, such as branding. As the company conducted 80% of the patent’s research and development in Australia, Watson can include $140 million in the patent box, which is taxed at 17%. The remaining $40 million is taxed at 30%. With the patent box, Watson Medical Technologies will pay a total $35.8 million in tax, compared to up to $54 million without.
In implementing a patent box, the government has stated an intention to engage with industry on its design.
It is apparent that adoption of a patent box, which is already in place in around 20 countries, will encourage local research and innovation which are important in maintaining Australia’s international competitiveness. In addition, it will aid in the commercialisation of a company’s Australian patents and support local manufacture of products, the subject of these patents.
It is to be expected that the patent box will also result in high-value jobs associated with the development, manufacture and exploitation of patented technology being created and retained in Australia.
Whilst Australia is a well-recognised leader in life sciences technologies, it is to be hoped that if the patent box is successfully applied to these technologies, it will be expanded to encompass other technologies. In this regard, the government has flagged that it will consult closely with industry to determine if it may be an effective way of supporting clean energy technologies.