Taking AIM: does Australia need a Patent Box-style system?

The R&D tax incentive is acknowledged in the industry as a positive for developing intellectual property, though there’s a push from medical manufacturers and others for assistance in taking IP to the next stage.

 

AusBiotech, Cook Medical Australia, the Export Council of Australia, and the Medical Technology Association of Australia recently launched their Australian Innovation & Manufacturing (AIM) Incentive policy paper. At its core is reduced tax rate for qualifying IP commercialised in Australia, based on the UK’s Patent Box system.

“We’re just not keeping our IP in Australia, or developing our IP from the IP to commercialisation,” Susi Tegen, CEO of MTAA, told Manufacturers’ Monthly.

Among other indicators of a dire situation, Tegen cited 2013’s INSEAD research. The business school’s study found Australia 11th for innovation input – confirming that we aren’t slouches with research – but 32nd in innovation output.

Disturbingly, the research compared the two results to create an “innovation efficiency ratio”, which ranked Australia 116 of 140 nations.

Many have argued that in Australia there’s a broken pipeline between creating great ideas and capitalising on them commercially. The AIM, rewarding smart companies for taking their idea to market with lower taxation, is offered as part of a remedy to this.

The system it is modelled on is the UK’s Patent Box, which began to be phased in on April 1 last year, and is part of that government’s growth agenda (outlined in its Plan For Growth document.)

It wasn’t the first Patent or Innovation Box system introduced, with Ireland bringing in a scheme in 2000 (since abandoned) and the French the year after.

There are currently 10 countries with such a scheme (nine in Europe, plus China).  

The UK’s Patent Box sees profits from qualifying patented inventions taxed at 10 per cent rather than the corporate tax rate of 21 per cent. It includes patented products and products incorporating a patent granted in the UK, by the European Patent Office, or by certain countries in the European Economic Area.

According to Julian Christmas, Tax & Finance Specialist, UK Trade and Investment, the scheme has already shown promise.

“I more or less exclusively talk to overseas businesses about what it looks like to come to the UK and how they can benefit from our tax system and tax incentives,” Christmas told Manufacturers’ Monthly.  

“We’ve had companies who have engaged in that process and a positive result from HMRC [Her Majesty’s Revenue and Customs, responsible for tax collections] and it’s basically fundamental to their decision to come to the UK.”

Fans of such tax relief schemes argue that to be competitive as countries look to stay ahead as or transition to knowledge-based economies, local businesses have to be encouraged to develop their IP. Also, overseas companies will be lured to where they’ll be treated favourably.

Supporters also argue that – being profit-based – it only applies to those who have actually been successful, and is an alternative to serving out grants that will not always guarantee a result.

Those who have an idea that people want to pay money will want to go where the environment is most suitable.

“We have countries like Singapore, that are actually not very good at ideas, but they’re great at providing the right environment for companies to thrive and ideas to thrive,” offered Tegen.

It’s part of a strategic vision, including the role of intelligent manufacturing in a modern economy. And these things don’t emerge by accident.

“The UK thing represents 10 years of strategy,” Dr Rob Phillips, executive chairman of non-invasive cardiovascular monitor manufacturer USCOM, told Manufacturers’ Monthly.

“Singapore have had 20 years of setting in place a strategy where they are actively encouraging the growth of smart industries.”

Those backing AIM argue that it’s an idea whose time has come, with the much-publicised job losses in manufacturing in recent years proof of a need to do something.

According to Tegen’s group, shadow industry minister Bob Baldwin expressed “some enthusiasm” for the idea. There’s some hope that it’ll be considered in the federal government’s tax white paper, expected next week.

The value of Australia’s longstanding R&D tax incentive is recognised, so much so that the UK based its own R&D tax deduction credit scheme on it.

R&D tax incentives are seen as useful worldwide, and are an “important policy instrument” among several of the countries in the OECD.

The AIM would work complementary the R&D tax break regime, say its backers. Christmas noted that the UK scheme is part of a range of measures in place to attract business, such as R&D tax credits, the Seed Enterprise Incentive Scheme and the Enterprise Investment Scheme.

From those opposed the a Patent Box-type scheme in Australia, there are arguments including that it will lead to creative accounting exercises and international profit shifting that will cost the country legitimate revenue.

For example, the Uniting Church told Fairfax earlier this year it would just see “more profits flow to people who are already rich and have far more than they need.''

Counter arguments hold that that, yes, the scheme does come at the expense of tax revenue (at a time where the federal budget is in pronounced deficit, no less), but without it the country could see more manufacturers choosing to up and leave (or just fail) and miss out on potential foreign investment.

“I think we are faced with companies leaving Australia, so it’s not a question of, say, having 30 per cent of something,” Helen Fisher, Leader – Life Sciences, Deloitte, told Manufacturers’ Monthly.

“It’s basically better to have 10 or 15 per cent of something than 30 per cent of nothing.”

In a globalised world, successful companies can simply move where it suits them. Many are invited to do so, said Tegen.

“I have companies always saying to me ‘I’ve been approached by another Singaporean’,” she explained.

“It’s either a company, an economic development board, a university, a business hub – the governments in those countries are extremely aggressive about bringing people and companies.”

For USCOM, which has been listed for 10 years and is about to become profitable, it hopes that Australia can make its environment more globally competitive.

“You need constancy, you need certainty, and you need a cultural recognition that it’s important,” said Phillips.

“Smart people go to where it works. And if companies are more profitable somewhere else, they can pay people more, it’s a dynamic industry and high-cost environments, high-tax environments are just anathema to creative, innovative companies.

“In a globalised environment, governments have to be competitive; as do manufacturers. We can all move. And that’s a challenge for government and policymakers.”

 

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