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One of the most interesting policy developments in the global innovation race is known as a patent box, which provides preferential tax treatment for corporate income that comes from patented products. The goal is to encourage commercialization of R&D. Most people in the United States have never heard of patent boxes but within just the last four years, seven countries have adopted the idea. The Netherlands has even expanded its patent box into an "innovation box" that allows profits from R&D-based products or services that have not resulted in a patent or trademark to also be eligible for the lower patent box tax rate. Is the U.S. falling even further behind in the race for global innovation because it has not adopted a patent box? Can a patent box be a way for the U.S. to jump start its global competitiveness?
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Patent Boxes: Innovation in Tax Policy and Tax Policy for Innovation
October 4, 2011
Rob Atkinson, President, ITIF
U.S. Ranks 43rd in Rate of Progress on Innovation-Based Competitiveness (1999-2011)
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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.
Tax Policy is a Key in the New Race for Global Innovation Advantage
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The U.S. ranks 17th of 30 for R&D tax generosity
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OECD R&D Tax Credit Score
Source: OECD
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.
Patent Boxes: The Latest Tool
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Patent Boxes: the Latest Tool
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Country Year Enacted
Belgium 2008
China 2008
France 2005
Ireland 1973
Luxembourg 2008
The Netherlands 2007
Spain 2008
Switzerland N/A
Patent Boxes: The Latest Tool
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Country Regular Corporate Tax Rate
Patent Box Rate Qualifying Income
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
Market Failures Spillovers Risk
Globally Competitive Corporate Tax Code Taxation of mobile vs. immobile activities
The Economic Theory Behind Patent Boxes
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Limited Data Makes Evaluation Difficult
Effectiveness of Patent Boxes
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Patent boxes do appear to induce more patent income
Effectiveness of Patent Boxes
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No Patent Box
Patent Box
Source: Rachel Griffith, Helen Miller and Martin O’Connell, 2010
But not more tax revenues (at least in the short term)
Effectiveness of Patent Boxes
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Source: Rachel Griffith, Helen Miller and Martin O’Connell, 2010
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No Patent Box
Patent Box
European design limitation: incentive is not tied to performance
of R&D or production domestically.
Would Patent Boxes be More Effective if They Were Redesigned?
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Rate
Issues in the Design of a U.S. Patent Box
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Rate Eligible Activity
Issues in the Design of a U.S. Patent Box
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Rate
Eligible Activity
Link to R&D and Production
Issues in the Design of a U.S. Patent Box
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Rate
Eligible Activity
Link to R&D and Production
Income from Patents Under Review
Issues in the Design of a U.S. Patent Box
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The United States Would Benefit from an Appropriately Designed Patent Box
Conclusion
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Robert Atkinson [email protected]
Facebook: facebook.com/innovationpolicy Blog: www.innovationpolicy.org YouTube: www.youtube.com/user/techpolicy Website: www.itif.org Twitter: @robatkinsonitif
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