The budget speech announced the government was launching a new ‘patent box’. A patent box gives tax concessions to income earned from patents and it is intended to apply to patents in the medical and biotech sectors and potentially to the clean energy sector. The concessional tax rate is to be 17 per cent rather than the usual company tax rate of 30 per cent (or 25 for smaller companies).
The speech (but not the documentation in Budget Paper No 2) says it will apply to new patents from 1 July 2022 but it is expected to cost $100 million in foregone tax revenue in both 2023-24 and 2024-25. To ramp up to a stable level so quickly seems more consistent with a scheme that applies to all existing patents. Otherwise, one would think that the time between lodging a patent and making money from it would be fairly long.
While the details are still to be worked out it might be expected that the tax concession would not be available for an Australian patent holder whose substantial activity is overseas.
The point has been made before; if you wanted to encourage innovation then the way to do it is to encourage the activities such as research and development that lead up to an innovation. By the time anyone is making a profit from an innovation it is far too late to encourage the original innovation activity. See here. Internationally the patent box is seen as “add[ing] another layer of complexity to domestic and international taxation with new costs and new opportunities for manipulation, especially for multinational enterprises…Although claimed to advance national competitiveness, this favors [sic] established and profitable multinationals over small domestic startups with few patents that have yet to turn a profit.”
The patent box does not encourage R&D but gives more money to those who commercialise the patent in Australia. There may be a good argument for encouraging greater domestic activity in the medical and biotech industries. But we should be clear that the patent box is a measure that protects economic activity in Australia relative to overseas activity. It only protects economic activity based on Australian patents.
If we genuinely want to promote Australian manufacturing in the medical and biotech industries there are better mechanisms that might be considered. Similarly if we want to encourage R&D there are much better mechanisms. The patent box risks merely adding another tax lurk for multinationals in a race to the bottom against other patent boxes in the UK and elsewhere.