Speaking recently at a business event in London, Treasurer Josh Frydenberg, in response to being asked whether he would introduce an equivalent of the UK’s patent box scheme, indicated that the Federal government was considering a patent box scheme.

“We need to have a tax regime around intellectual property to attract companies and maintain their investments in Australia.”

“I’m happy to have a close look at what they [the British] dobecause we certainly should be not only trying to protect intellectual property but also accelerate it.”

Since 2013, the UK has had a patent box tax scheme that allows companies who own or exclusively license patents to apply a lower corporate tax rate of 10% to profits derived from the exploitation of IP, compared to the 19% general corporate tax rate.

Similar patent box tax schemes operate in a number of European countries including Belgium, Ireland, France, the Netherlands and Spain, as well as China.  Although all the schemes offer a lower tax rate for profits derived from IP, the IP that attracts a reduced tax rate varies from country to country.  The three broad objectives of patent box schemes have been to:

  • Promote increased domestic investment in innovation.
  • Create high-paying jobs.
  • Stem or reverse the erosion of domestic tax base that can occur when mobile sources of income are transferred to tax havens or other low-tax countries through transfer pricing or licensing arrangements.

In 2015, the Office of the Chief Economist released a report looking at patent box tax schemes globally and whether there was a case for a patent box tax scheme in Australia.  The report found that a patent box scheme in Australia was likely to have a negative return on government tax revenue and stated, "Patent box policies are winner-takes-all policies and adjustments at the margin are likely to hurt the economy".  The report also found that patent box tax schemes are not an appropriate innovation policy tool and that such a scheme would lead to an increase in the number of ‘opportunistic’ patents being filed.

The report garnered widespread criticism.  In particular, it failed to consider the primary benefits of a patent box scheme in Australia, in particular that such a scheme would provide an incentive for Australian businesses to retain innovation and manufacturing within Australia. 

Take the example of CSL who in 2014, after considering a number of countries for its new plant’s location, chose Switzerland.  This decision came about around the same time as CSL’s submission to the Senate Inquiry on Australia’s Innovation System, in which CSL said “Australia is a relatively unattractive location for entrepreneurial manufacturing or as a base from which to commercialise locally developed IP into global markets” and “it seems clear that Australia is unlikely to reap the rewards of its innovation investment, to develop high skill, high wage jobs and industries in Australia, if it does not introduce a similar type of [patent box scheme] initiative”.

The Treasurer’s comments gives hope that finally, Australia may implement a patent box tax scheme.

Written by: John Lee and Vanessa Farago-Diener

Expertise Area