One of the more novel innovations in this week’s budget was the introduction of a “Patent Box”.
Despite the creative name a patent box is a relatively straightforward concept - it lowers the tax rate on all income derived from patents registered in Australia. Initially the scheme will be limited to medical and biotechnology patents, but with scope to expand it down the track. Josh Frydenberg claimed that such a scheme would boost innovation in Australia driving new ideas and products into the economy.
But will it work?
Unfortunately the evidence from overseas is not promising.
A European Commission report examining patent boxes across a range of countries found that they primarily create a financial advantage for the companies involved, with very limited effects on local R&D. Multinational companies end up filing more patents than they previously would have and take advantage of the lower tax rate, but don’t change the location of their research teams.
Instead patent boxes tend to act as the winner takes all race to the bottom. The country that grants the most preferential tax rate will win the lion share of patent filings. But with corporate tax rates lowered across the board the primary beneficiaries are multinational corporations who use the schemes to reduce their tax burden.
What’s most curious is that this should be well known to the government.
A 2015 report by the Department of Industry came to a similar conclusion stating that while more patents might be filed in Australia, they will mostly be ones derived from R&D conducted overseas. And since the subsidy will carry a large cost to taxpayers the patent box will have an overall negative effect on Australia.
IP Australia has also detailed the poor record of Patent Boxes in a submission to the “Inquiry into Australia’s Future in Research and Innovation”. According to their submission the literature on such schemes consistently finds little if any impact on actual innovation with taxpayers on the hook for the bill.
Furthermore, Frydenberg's proposed patent box is very poorly targeted. Ideally the subsidy would only apply to new patents (or better yet new inventions), but the budget will allow *all* patents to claim the lower tax rate even if they were granted many years ago or no longer owned by their original inventor. In its first year the patent box will funnel $100 million of taxpayer cash to firms sitting on old patents without incentivising any actual innovation!
Even if you want to subsidise innovation it makes zeros sense to subsidise old patents and indeed many countries avoid this pitfall by limiting it to new ones.
In short patent boxes seem like a bad idea. One that sounds nice in theory, but in practice result in just one more way for multinational companies to avoid paying tax in Australia.