The Australian Labor government has decided to scrap the “patent box” tax break designed for the medical and biotech industry by the former Coalition government. The policy would have provided a 17% concessional corporate tax rate for income derived from medical and biotech intellectual property to encourage innovation and research and development in the industry. However, concerns were raised by local tax officials that the policy could be exploited by multinationals to engage in harmful tax practices like profit-shifting to low-tax jurisdictions. Furthermore, the Organization for Economic Co-operation and Development has also noted that low tax rates for intellectual property-related income could lead to similar problems. More than 20 other countries, including the UK and Singapore, have similar schemes.
The Labor government aims to crack down on multinational tax avoidance and has no plans to legislate the patent box policy. The measure was designed to attract innovation, research, and development to Australia at an estimated cost of $206 million to the budget over four years. Former Treasurer Josh Frydenberg announced the policy in the May 2021 budget, and it was designed to encourage companies to base their research and development operations and commercialise innovation in Australia to retain associated patent profits in the country.
Business groups argue that the targeted tax break was necessary after the former Coalition government failed in the Senate to reduce the corporate tax rate from 30% to 25%. The Business Council of Australia urged the government to implement the patent box tax regime, which is intended to encourage investment in the innovation and technologies of the future to enable Australia to compete for that research and subsequent commercialisation. However, the Labor government has decided not to legislate the policy, and sources say it is not on their agenda.
A report for the Department of Industry by economist Gaéten de Rassenfosse in 2015 suggests that the patent box would increase the number of patent applications filed in Australia. However, most of the additional patent applications are likely to be opportunistic, and the R&D leading to these patent applications is likely to be performed abroad. The implementation of a patent box regime is likely to lead to a fall in tax revenues collected from innovative companies, which will likely exceed the revenues collected from (re)allocation of IP income to Australia. Therefore, the overall return of a patent box regime is likely to be negative.
