A recent report expresses concern over the patent box regime, but the debate is far from over.

The Office of the Chief Economist released a report last week regarding the possible impacts of a patent box regime in Australia.

What did the report say?

For those who missed it, the report focuses on the fact that tax revenues would fall if Australia introduced a patent box program. This is because Australian businesses already registering patents as part of their IP strategy would see an immediate reduction in tax payable on income attributable to those patents.

This is uncontested. You would expect at least a short-term reduction in tax revenue when implementing any new tax offset or preferential tax measure. Think, for example, a reduction in the company tax rate or an increase in the personal income tax free threshold. These changes, in isolation, would immediately reduce tax revenue.

What did they leave out?

What the report doesn’t discuss is the primary benefit of the regime. Namely its potential to stop innovative Australian businesses moving offshore to countries that provide a more attractive business environment. The examples commonly used are CSL and Atlassian – smart Australian businesses that have overlooked Australia to set up shop or make some form of commercial investment.

It’s more difficult to quantify the revenue and other societal benefits that are lost because of this business migration. But any meaningful analysis of the relative benefits of a patent box program must factor this in. As more data becomes available regarding patent box programs operating in other jurisdictions, these benefits – financial and otherwise - will become clearer and easier to measure.

The report also draws some of its conclusions based on European programs that lack the now OECD endorsed “modified nexus approach”. This approach requires that the R&D that produced the relevant patent be undertaken in-country, effectively linking the local tax benefit to local innovation.

Other patent box nations are currently in a transitional phase to implement this condition, and it would be a vital component of any well designed Australian patent box program.

What’s the takeaway?

The debate over the relative benefits of patent box programs is far from over.

While the report expresses concern over the regime, Bill Ferris, Turnbull’s new Innovation Australia chairman, has since stated that a patent box system is an option for the Government’s Innovation Statement next month. Ferris agrees that if a patent box program encourages private entrepreneurs to maximise their IP development and gains in Australia “in a meaningful way”, it should be considered.

Griffith Hack has been actively campaigning the Federal Government to consider a patent box program. This applies not only to patent box regimes, but any reforms that could improve the environment in which Australian organisations operate.

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