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October 4, 2011

Patent Boxes: Innovation in Tax
Policy and Tax Policy for
Innovation


Rob Atkinson, President, ITIF
0.0
                            5.0
                                  10.0
                                         15.0
                                                20.0
                                                       25.0
            China
        S. Korea
          Cyprus
        Slovenia
         Estonia
     Czech Rep.
          Latvia
      Singapore
          EU-10
        Portugal
        Hungary
       Lithuania
             India
          Austria
            Chile
          Greece
            Japan
        Slovakia
         Finland
       Denmark
      Australia
      Indonesia
          Ireland
               UK
           Brazil
          Mexico
          Poland
           EU-25
                                                              Based Competitiveness (1999-2011)




    Netherlands
           Turkey
            Spain
      Argentina
         Russia
         Canada
        Malaysia
           EU-15
          France
        Germany
         Sweden
        Belgium
          NAFTA
    South Africa
                                                              U.S. Ranks 43rd in Rate of Progress on Innovation-




              U.S.
2




              Italy
Tax Policy is a Key in the New Race for Global
 Innovation Advantage

 Corporate tax rates for OECD nations have declined
from nearly 50 percent in the mid-1980s to less than 30
percent in 2009, while the combined federal-state rate has
remained at about 39 percent.

 U.S. R&D tax credit was the most generous in the
OECD in 1992, and is now the 17th most generous.




                                                             3
Source: OECD
                                   0.1
                                   0.2
                                   0.3
                                   0.4




                                  0.05
                                  0.15
                                  0.25
                                  0.35
                                  0.45




                                     0
                         Spain
                       Mexico
                      Portugal
                Czech Republic
                        France
                       Norway
                       Canada
                         Korea
                  New Zealand
                      Hungary
                      Denmark
                        Turkey
                           UK
                        Japan
                                         OECD R&D Tax Credit Score




                      Australia
                   Netherlands
                 United States
                      Belgium
                       Austria
                       Ireland
                       Poland
                                                                     The U.S. ranks 17th of 30 for R&D tax generosity
Patent Boxes: The Latest Tool

Patent boxes allow corporate income from the sale of
patented products to be taxed at a lower rate than other
income.

 Within the last several years, 8 nations (7 in Europe )
have enacted patent box regimes that incentivize firms to
patent or produce other related innovations.




                                                            5
Patent Boxes: the Latest Tool
Country               Year Enacted
Belgium               2008
China                 2008
France                2005
Ireland               1973
Luxembourg            2008
The Netherlands       2007
Spain                 2008
Switzerland           N/A

                                     6
Patent Boxes: The Latest Tool
Country           Regular         Patent Box Rate    Qualifying Income
                  Corporate Tax
                  Rate

Belgium                     20%              6.8% Patents and supplementary protection
                                                     certificates
China                       16%           0-12.5% Registered patents and know-how
France                      34%              15% Patents and supplementary protection
                                                     certificates


Ireland                     10%             ˂10% Most IP

Luxembourg                  17%              5.9% Software, copyrights, patents, trademarks,
                                                     designs, or models


The Netherlands             17%                5% Patents or IP from qualifying and
                                                     approved R&D

Spain                       25%              15% Most IP
Switzerland                 21%             0-12% Most IP                                      7
The Economic Theory Behind Patent Boxes

 Market Failures
    Spillovers
    Risk

 Globally Competitive Corporate Tax Code
    Taxation of mobile vs. immobile activities




                                                  8
Effectiveness of Patent Boxes
 Limited Data Makes Evaluation Difficult




                                            9
Effectiveness of Patent Boxes
 Patent boxes do appear to induce more patent income
  35%


  30%


  25%


  20%


  15%                                                              No Patent Box
                                                                   Patent Box
  10%


  5%


  0%




Source: Rachel Griffith, Helen Miller and Martin O’Connell, 2010
                                                                                   10
Effectiveness of Patent Boxes
 But not more tax revenues (at least in the short term)
   120%


   100%


    80%


    60%


    40%                                                            No Patent Box


    20%                                                            Patent Box



     0%




Source: Rachel Griffith, Helen Miller and Martin O’Connell, 2010
                                                                                   11
Would Patent Boxes be More Effective if They
 Were Redesigned?

 European design limitation: incentive is not tied to performance
  of R&D or production domestically.




                                                                     12
Issues in the Design of a U.S. Patent Box

    Rate




                                                13
Issues in the Design of a U.S. Patent Box

   Rate

   Eligible Activity




                                            14
Issues in the Design of a U.S. Patent Box

     Rate

     Eligible Activity

     Link to R&D and Production




                                                15
Issues in the Design of a U.S. Patent Box

    Rate

    Eligible Activity

    Link to R&D and Production

    Income from Patents Under Review



                                                16
Conclusion

 The United States Would Benefit from an Appropriately
  Designed Patent Box




                                                          17
Thank You
Robert Atkinson
ratkinson@itif.org
Follow ITIF:


    Facebook: facebook.com/innovationpolicy
    Blog: www.innovationpolicy.org
    YouTube: www.youtube.com/user/techpolicy
    Website: www.itif.org
    Twitter: @robatkinsonitif

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Patent Boxes: Innovation in Tax Policy and Tax Policy for Innovation

  • 1. October 4, 2011 Patent Boxes: Innovation in Tax Policy and Tax Policy for Innovation Rob Atkinson, President, ITIF
  • 2. 0.0 5.0 10.0 15.0 20.0 25.0 China S. Korea Cyprus Slovenia Estonia Czech Rep. Latvia Singapore EU-10 Portugal Hungary Lithuania India Austria Chile Greece Japan Slovakia Finland Denmark Australia Indonesia Ireland UK Brazil Mexico Poland EU-25 Based Competitiveness (1999-2011) Netherlands Turkey Spain Argentina Russia Canada Malaysia EU-15 France Germany Sweden Belgium NAFTA South Africa U.S. Ranks 43rd in Rate of Progress on Innovation- U.S. 2 Italy
  • 3. Tax Policy is a Key in the New Race for Global Innovation Advantage  Corporate tax rates for OECD nations have declined from nearly 50 percent in the mid-1980s to less than 30 percent in 2009, while the combined federal-state rate has remained at about 39 percent.  U.S. R&D tax credit was the most generous in the OECD in 1992, and is now the 17th most generous. 3
  • 4. Source: OECD 0.1 0.2 0.3 0.4 0.05 0.15 0.25 0.35 0.45 0 Spain Mexico Portugal Czech Republic France Norway Canada Korea New Zealand Hungary Denmark Turkey UK Japan OECD R&D Tax Credit Score Australia Netherlands United States Belgium Austria Ireland Poland The U.S. ranks 17th of 30 for R&D tax generosity
  • 5. Patent Boxes: The Latest Tool Patent boxes allow corporate income from the sale of patented products to be taxed at a lower rate than other income.  Within the last several years, 8 nations (7 in Europe ) have enacted patent box regimes that incentivize firms to patent or produce other related innovations. 5
  • 6. Patent Boxes: the Latest Tool Country Year Enacted Belgium 2008 China 2008 France 2005 Ireland 1973 Luxembourg 2008 The Netherlands 2007 Spain 2008 Switzerland N/A 6
  • 7. Patent Boxes: The Latest Tool Country Regular Patent Box Rate Qualifying Income Corporate Tax Rate Belgium 20% 6.8% Patents and supplementary protection certificates China 16% 0-12.5% Registered patents and know-how France 34% 15% Patents and supplementary protection certificates Ireland 10% ˂10% Most IP Luxembourg 17% 5.9% Software, copyrights, patents, trademarks, designs, or models The Netherlands 17% 5% Patents or IP from qualifying and approved R&D Spain 25% 15% Most IP Switzerland 21% 0-12% Most IP 7
  • 8. The Economic Theory Behind Patent Boxes  Market Failures  Spillovers  Risk  Globally Competitive Corporate Tax Code  Taxation of mobile vs. immobile activities 8
  • 9. Effectiveness of Patent Boxes  Limited Data Makes Evaluation Difficult 9
  • 10. Effectiveness of Patent Boxes  Patent boxes do appear to induce more patent income 35% 30% 25% 20% 15% No Patent Box Patent Box 10% 5% 0% Source: Rachel Griffith, Helen Miller and Martin O’Connell, 2010 10
  • 11. Effectiveness of Patent Boxes  But not more tax revenues (at least in the short term) 120% 100% 80% 60% 40% No Patent Box 20% Patent Box 0% Source: Rachel Griffith, Helen Miller and Martin O’Connell, 2010 11
  • 12. Would Patent Boxes be More Effective if They Were Redesigned?  European design limitation: incentive is not tied to performance of R&D or production domestically. 12
  • 13. Issues in the Design of a U.S. Patent Box  Rate 13
  • 14. Issues in the Design of a U.S. Patent Box  Rate  Eligible Activity 14
  • 15. Issues in the Design of a U.S. Patent Box  Rate  Eligible Activity  Link to R&D and Production 15
  • 16. Issues in the Design of a U.S. Patent Box  Rate  Eligible Activity  Link to R&D and Production  Income from Patents Under Review 16
  • 17. Conclusion  The United States Would Benefit from an Appropriately Designed Patent Box 17
  • 18. Thank You Robert Atkinson ratkinson@itif.org Follow ITIF: Facebook: facebook.com/innovationpolicy Blog: www.innovationpolicy.org YouTube: www.youtube.com/user/techpolicy Website: www.itif.org Twitter: @robatkinsonitif