Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2019-2020-2021-2022
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TREASURY LAWS AMENDMENT (TAX CONCESSION FOR AUSTRALIAN
MEDICAL INNOVATIONS) BILL 2022
EXPLANATORY MEMORANDUM
(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)
Table of Contents
Glossary iii
General outline and financial impact ...................................................... 1
Patent box ................................................................... 3
Statement of Compatibility with Human Rights .......... 19
Attachment 1: Regulation Impact Statement .................................... 21
Glossary
This Explanatory Memorandum uses the following abbreviations and acronyms.
Abbreviation Definition
ARTG Australian Register of Therapeutic Goods
BEPS Action 5 Report OECD/G20 Base Erosion and Profit Shifting
Project Action 5: 2015 Final Report:
Countering Harmful Tax Practices More
Effectively, Taking into Account
Transparency and Substance.
Bill Treasury Laws Amendment (Tax
Concession for Australian Medical
Innovations) Bill 2022
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
MEC Group Multiple Entry Consolidated Group
OECD Organisation for Economic Co-operation and
Development
R&D Research and Development
R&D Tax Incentive Research and Development Tax Incentive
TGA Therapeutic Goods Act 1989
USPTO United States Patent and Trademark Office
Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
General outline and financial impact
Patent box
Outline
The Bill amends the ITAA 1997 to introduce the patent box regime which provides
concessional tax treatment for ordinary and statutory income derived by a corporate
taxpayer from exploiting a medical or biotechnology patent.
Where the taxpayer meets the eligibility criteria for the patent box regime, income
directly attributable to the eligible patent will benefit from being subject to an effective
income tax rate of 17 per cent, to the extent that the taxpayer undertakes the R&D of
that patent in Australia. This concession is designed to encourage innovation and
commercialisation of medical and biotechnology inventions to occur and remain in
Australia.
Date of effect
The Bill applies to patents granted or issued after 11 May 2021 in respect of income
years starting on or after 1 July 2022.
Proposal announced
The Bill fully implements the Patent Box -- tax concession for Australian medical and
biotechnology innovations measure from the 2021-22 Budget.
Financial impact
This measure is estimated to decrease the underlying cash balance by $120 million
over the forward estimate period.
All figures in this table represent amounts in $m.
2020-21 2021-22 2022-23 2023-24 2024-25
0.0 0.0 0.0 -50.0 -70.0
Regulation impact statement
The Regulation Impact Statement covering the amendments in Schedule 1 has been
included in Attachment 1.
1
General outline and financial impact
Human rights implications
This Bill does not raise any human rights issues. See Statement of Compatibility with
Human Rights -- Chapter 2
Compliance cost impact
The patent box regime has high ongoing compliance costs for companies wishing to
access the lower tax rate.
2
Patent box
Table of Contents:
Outline of chapter .................................................................................. 3
Context of amendments ......................................................................... 3
Summary of new law.............................................................................. 4
Detailed explanation of new law ............................................................ 5
Patent box eligibility......................................................................... 5
Patent box income rules .................................................................. 9
Consequential amendments ................................................................ 18
Application and transitional provisions ................................................. 18
Outline of chapter
1.1 The Bill amends the ITAA 1997 to introduce concessional tax treatment for
ordinary and statutory income derived by a corporate taxpayer from exploiting
a medical or biotechnology patent for income years commencing on or after
1 July 2022. This is referred to as the Australian patent box regime.
1.2 A taxpayer will benefit by that income being subject to an effective income tax
rate of 17 per cent to the extent that the taxpayer undertakes the R&D
underlying that patent in Australia.
1.3 The objective of the patent box regime is to encourage investment and
innovation in Australian medical and biotechnology industries. The regime
aims to provide an incentive for businesses to undertake their R&D and to
commercialise their patented inventions in Australia.
1.4 All legislative references in this Chapter are to the ITAA 1997 unless
otherwise stated.
Context of amendments
1.5 In the 2021-22 Budget, the Government announced that it would introduce a
patent box regime for eligible corporate income associated with patented
inventions in the medical and biotechnology sectors. The Government released
3
Patent box
a Patent Box Discussion Paper on Policy and Design for public consultation
from 5 July 2021 to 16 August 2021.
1.6 The patent box regime provides a concessional effective tax rate of 17 per cent
on eligible patent income. The reduced tax rate means that it is a preferential
tax regime.
1.7 The Government's key objectives of the patent box regime are:
• to encourage companies to base their medical and biotechnology R&D
operations in Australia; and
• to commercialise these patented inventions in Australia.
1.8 To ensure the Australian patent box is not considered a harmful tax practice,
the regime is designed to comply with the nexus approach outlined in the
BEPS Action 5 Report.
1.9 This report requires 'substantial activity' to be undertaken by a taxpayer who
benefits from a preferential tax regime. Under the nexus approach as outlined
in the report, benefits under a patent box must decrease where the taxpayer
does not conduct the R&D itself, but either outsources R&D activities to a
related party overseas or acquires intellectual property developed by another
party.
1.10 In principle, a taxpayer can only benefit from the patent box to the extent the
underlying R&D was undertaken by the taxpayer. This protects profits from
being artificially shifted away from the country where value is created.
1.11 The nexus requirement leverages the R&D Tax Incentive as a basis for
determining qualifying R&D expenditure. This is intended to provide
taxpayers with a means to apply the nexus approach using concepts from the
existing R&D legislative framework. This approach limits the overall
compliance burden and ensures the benefit provided by the patent box is
proportional to the R&D that the taxpayer has undertaken in Australia.
Summary of new law
1.12 The Bill introduces the Australian patent box regime as Division 357. This
Division allows for the assessable income derived from exploiting a medical or
biotechnology patent to be reduced, so that income attributable to R&D
undertaken in Australia is subject to an effective tax rate of 17 per cent.
1.13 The patent box regime is optional for corporate taxpayers who are either:
• Australian residents; or
• residents of another country who carry on business at or through a
permanent establishment in Australia under a double tax agreement in
force between Australia and that other country.
4
Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
1.14 To be eligible for the patent box regime, an entity must be a patentee who
holds rights over an eligible medical or biotechnology patent linked to a
therapeutic good included on the ARTG.
1.15 Where ordinary or statutory income is derived from exploiting an eligible
patented invention, the portion of the income that is attributable to that patent
must be determined so as best to achieve consistency with OECD transfer
pricing principles. This portion is further reduced relative to the amount of
R&D conducted within Australia by the entity or an associate, compared with
both the R&D activities outsourced overseas to related entities and the cost of
any acquired intellectual property by the R&D entity.
1.16 The remaining income is considered attributable to the taxpayer's development
of that patent and therefore benefits under the patent box regime by being
made partially non-assessable non-exempt income.
Detailed explanation of new law
1.17 A taxpayer may elect for a portion of the ordinary and statutory income
derived from all eligible medical or biotechnology patents that would
otherwise be included in assessable income to be made non-assessable
non-exempt income, so that this income is subject to an effective income tax
rate of 17 per cent.
[Schedule 1, item 1, sections 357-1, 357-5 and subsection 357-10(1)]
Patent box eligibility
1.18 To access the concessional tax treatment provided by the patent box, the
taxpayer must meet the eligibility criteria for the patent box regime.
R&D entity
1.19 An entity eligible for the patent box regime is defined by reference to the
definition of R&D entity in the R&D Tax Incentive provisions contained in
section 355-35.
[Schedule 1, item 1, subsections 357-10(1) and (2)]
1.20 That is, the patent box regime is available for corporate taxpayers who are
either:
• Australian residents; or
• are residents of another country who carry on business at or through a
permanent establishment in Australia under a double tax agreement in
force between Australia and that other country.
[Schedule 1, item 1, section 357-10]
5
Patent box
1.21 Using this existing definition of R&D entity reduces compliance costs for
eligible taxpayers. This is because these entities are already required to keep
records demonstrating their R&D expenditure and R&D activities which are to
be used for the purposes of applying the patent box regime.
1.22 For tax consolidated groups and MEC groups, the law applies as if it were a
single entity. This means that, for example:
• expenditure incurred by the subsidiary on R&D activities (or
expenditure by the subsidiary on R&D activities undertaken by a third
party) is taken to be incurred by the head company;
• R&D activities conducted by one member of the group for another
member of the same group are taken to have been conducted by the
head company on its own behalf.
Patent box election
1.23 To access the patent box regime, the taxpayer must elect for the patent box
regime to apply. This election is irrevocable and applies prospectively.
[Schedule 1, item 1, section 357-10]
1.24 Where a taxpayer makes an election for the patent box to apply, it applies in
respect of all of the taxpayer's eligible medical and biotechnology patents on a
prospective basis. This means that all income attributable to an eligible patent
derived or received after the election has been made is required to be brought
into the patent box, subject to satisfying the remaining conditions of the
regime.
[Schedule 1, item 1, subsection 357-10(4)]
1.25 The election must be made in the approved form and must be given to the
Commissioner. The election must be made before or at the time the taxpayer is
required to lodge their income tax return for the relevant income year. The
Commissioner cannot extend the time for making this election.
[Schedule 1, item 1, subsections 357-10(2) and (4)]
1.26 Where income is derived in an income year prior to the remaining conditions
of the patent box regime being satisfied, such as milestone payments, the
taxpayer may later seek to amend their income tax return in order to claim the
patent box concession in respect of that income once those patent box
conditions are satisfied. The taxpayer's statutory amendment period does not
operate to prevent such an amendment. However, in this situation, the taxpayer
must have made the patent box election before or at the time that the taxpayer
was required to lodge its income tax regime for the year in which that income
was derived or received.
[Schedule 1, item 1, section 357-35]
1.27 It is not possible for a taxpayer to make a patent box election that has
retrospective effect. That is, if the time by which the election must be made for
6
Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
an income year passes, the taxpayer cannot benefit from the patent box regime
for that income year.
[Schedule 1, item 1, section 357-10 and paragraph 357-35(b)]
1.28 Where a taxpayer seeks an amendment to their income tax assessment to claim
the patent box concession in respect of earlier income (such as milestone
payments), the taxpayer would be expected to adjust any related deductions
that are no longer available given that a portion of the patent income is made
non-assessable non-exempt income in the year to be amended or another
income year.
[Schedule 1, item 1, sub-paragraph 357-35(a)(ii)]
1.29 Where a taxpayer does not amend all earlier assessments, it will be open for
the Commissioner of Taxation to make such amendments to bring all of the
relevant income within the patent box and to make all appropriate deduction
adjustments. For this purpose, the taxpayer's statutory amendment period
under section 170 of the ITAA 1936 does not apply.
[Schedule 1, item 1, section 357-35]
1.30 If an entity that has made a patent box election joins a tax consolidated group,
the entity history rule in section 701-5 does not apply in respect of that
election. The head company of the tax consolidated group must make a patent
box election to be eligible for the patent box concession going forward.
[Schedule 1, item 3A, item 1A of the table in subsection 715-660(1)]
Qualifying patent
1.31 A patent qualifies for the patent box regime if it is one of the following:
• an Australian standard patent that has been granted by the
Commissioner of Patents;
• a United States Utility Patent issued by the USPTO; or
• a European Patent granted under the Convention on the Grant of
European Patents of 5 October 1973, as in force from time to time.
[Schedule 1, item 1, paragraph 357-15(1)(a) and subsection 357-15(3)]
1.32 An Australian standard patent granted by the Commissioner of Patents is a
patent that provides long-term protection and control over an invention. A
standard patent is granted when the Commissioner of Patents is satisfied that
the invention is novel, inventive and useful (and that the application meets
certain other statutory criteria).
1.33 The patentability standards and examination practice associated with the
granting of European Patents and the issuing of US Utility Patents are
understood to be broadly similar to patent standards and examination practices
in Australia. Recently, 97 per cent of medical and biotech patents filed by
Australian entities are filed in at least one of these three jurisdictions.
Restricting the patent box to these patents minimises the risk of inappropriate
7
Patent box
outcomes that may result from including patents that diverge significantly from
the outcomes of Australian granted patents.
1.34 By extending the patent box regime to include patents filed in these other
jurisdictions over technology developed in Australia, the patent box regime
captures almost all Australian medical or biotechnological inventions in line
with the policy intent.
1.35 To qualify for the patent box, the taxpayer must 'hold' an eligible patent within
the meaning of that term in the uniform capital allowance regime. The rights
that an entity has as patentee of an eligible patent constitutes 'intellectual
property' (subsection 995-1(1)). In accordance with item 10 of the table in
section 40-40, any depreciating asset (in this case, an item of intellectual
property) is 'held by' the owner of those rights. Therefore, per section 40-40,
the owner of those rights holds that patent.
[Schedule 1, item 1, subsection 357-15(4)]
1.36 An exclusive licensee of a patent does not satisfy this definition, as they hold
rights under the licence agreement as licensee, rather than rights under the
patent as patentee.
1.37 For the avoidance of doubt, the 'patent' itself, as an item of intellectual
property, constitutes a depreciating asset. This accords with the reference to a
'standard patent' as a depreciating asset in subsection 40-95(7).
1.38 Where the taxpayer acquires the patent from an owner, rather than developing
the patent itself, the patent is still eligible for the patent box. However, the
taxpayer may only benefit to the extent of improvements to the patented
invention that the taxpayer made after acquiring the patent. This is achieved by
the application of the R&D fraction.
[Schedule 1, item 1, section 357-30]
1.39 Where a taxpayer's patent is revoked or ceases, the taxpayer will not be able to
claim the patent box concession because it does not hold an eligible patent.
Linked to a therapeutic good
1.40 To be covered by the patent box regime, a patent must be linked to a
therapeutic good that is included on the ARTG maintained under section 9A of
the TGA. This confines the patent box regime to the medical and
biotechnology industry.
[Schedule 1, item 1, section 357-20]
1.41 If a therapeutic good included in the ARTG either contains or consists of a
pharmaceutical substance, or incorporates an invention, that is in substance
disclosed in the complete specification of the patent and falls within the scope
of the claim or claims of the patent specification, then the patent is sufficiently
linked to the registered good.
[Schedule 1, item 1, paragraph 357-15(1)(b) and subsection 357-15(2)]
8
Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
1.42 The patented invention or pharmaceutical substance does not have to account
for the entire therapeutic good and instead can be a singular component of the
good to qualify for the patent box.
1.43 For example, the patent may provide protection in respect of a new piece of
technology that is used for a particular part of a therapeutic good that does not
account for the whole good, but the complete good incorporating that piece of
technology would fall within the scope of claims of the patent due to its use of
this new technology.
1.44 The term 'therapeutic goods' has the same meaning as in section 3 of the TGA
and includes medicines, medical devices, and other goods such as blood
products and disinfectants.
[Schedule 1, item 4, subsection 995-1(1) definition of 'therapeutic goods']
1.45 The TGA regulates the supply, import, export, manufacturing and advertising
of therapeutic goods. All commercialised medical and biomedical products
must appear on the ARTG to be sold or exported into or out of Australia.
Accordingly, linking the patent to a therapeutic good appropriately extends the
patent box regime to the medical and biotechnology industry.
Patent box income rules
1.46 Where ordinary or statutory income is derived from exploiting a patent,
referred to as a patent box income stream, only the proportion of that income
that is attributable to the taxpayer's development of that patent is subject to
concessional tax treatment. This proportion is ascertained by the following
steps:
• identify all eligible patents that underlie the patent box income stream;
• determine a reasonable apportionment of the income arising from the
patent box income stream that is attributable to those patents; and
• reduce that amount to reflect the extent of the taxpayer's Australian
R&D activities.
A portion of this remaining amount is then made non-assessable and non-
exempt income to achieve an effective tax rate of 17 per cent.
[Schedule 1, item 1, subsection 357-25(1)]
1.47 The patent box concession applies to income years in which the R&D entity
has made the patent box election and to subsequent income years.
[Schedule 1, item 1, subsection 357-25(2)]
9
Patent box
Patent box income stream
1.48 Applying the patent box income rules requires the taxpayer to identify each
stream of ordinary or statutory income that arises from the exploitation of the
taxpayer's patent. Each of these streams of income is referred to as a patent
box income stream.
1.49 The concept of a patent box income stream is designed to identify the source of
that income, for example a sale, a dealing, the grant of a right, a balancing
adjustment event or the payment of damages or compensation in respect of that
patent. An amount that arises from a patent box income stream must be
ordinary or statutory income under a provision outside of Division 357. A
patent box income stream is not a new type of statutory income.
[Schedule 1, item 1, paragraphs 357-25(1)(a) and (b) and subsection
357-25(3)]
1.50 Ordinary or statutory income derived or received from the exploitation of the
underlying patent can arise from:
• sales or rental income derived by the taxpayer from the sale or dealings
of a therapeutic good linked to the taxpayer's eligible patent or patents;
• royalties or licence fees derived by the taxpayer for granting rights to
exploit the taxpayer's eligible patent or patents;
• a balancing adjustment event derived from proceeds of sale received
by the taxpayer from the sale or assignment of the taxpayer's eligible
patent or patents; and
• damages or compensation payable to the taxpayer in respect of the
taxpayer's patent or patents.
[Schedule 1, item 1, subsections 357-25(3) and (5)]
1.51 A patent underlies a patent box income stream if income is received or derived
from the exploitation of that patent. Where a patent is embedded in therapeutic
goods, the ordinary sales income derived on the sale of those therapeutic goods
arises from the patent box income stream (namely, the sale of those goods).
1.52 Where a taxpayer grants a licence over its patent to another entity who
manufactures the therapeutic goods incorporating that patented invention, the
licence fees (being ordinary income) derived by the taxpayer will constitute
amounts arising from a patent box income stream.
[Schedule 1, item 1, subsections 357-25(3) and (5)]
1.53 The taxpayer is required to determine the amount of ordinary or statutory
income derived in the income year that arises from each patent box income
stream. These amounts are kept separately so that different R&D fractions
(outlined further below) can be applied to accurately reflect the taxpayer's
involvement in the R&D of patents underlying each income stream.
[Schedule 1, item 1, paragraph 357-25(1)(a) and subsection 357-25(3)]
10
Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
1.54 Patent box income streams that result from the sale of different therapeutic
goods relying on the same patent must also be quarantined in different income
streams. The portion of income attributable to the patent for a specific good
may be different from that of another therapeutic good that relies on the same
patent.
1.55 Similarly, a therapeutic good may have been manufactured using the
inventions covered by multiple patents. In this case, the amount arising from
the patent box income stream would, for example, be the sales income from
selling the therapeutic good and the R&D fraction would be calculated by
combining the relevant expenditure for all of those underlying patents.
1.56 Income streams derived from either the sale or dealing with a therapeutic good
or the grant of the rights to exploit a patented invention, such as royalties or
licence fees, include milestone payments. Milestone payments may be
payments made to the R&D entity, which are in connection with an eventual
eligible patent or therapeutic good, however are made prior to the registration
of the patent or the therapeutic good.
1.57 Even though milestone payments made in connection with licencing fees and
royalties may occur before the right to exploit the patented invention is
granted, the payments must still otherwise be referable to the right to exploit
the patent when it arises or becomes eligible to benefit from the patent box
regime.
1.58 The taxpayer must meet the eligibility requirements of this Division for these
milestone payment amounts to benefit from the patent box concession. The
taxpayer may seek to amend its tax return for an earlier income year once the
criteria is met in order to receive the concessional tax benefit in respect of that
income stream.
[Schedule 1, item 1, subsection 357-25(4) and section 357-35]
1.59 Amounts included in the taxpayer's assessable income as a result of the
clawback for recoupment provisions of the R&D Tax Incentive do not arise
from a patent box income stream.
[Schedule 1, item 1, subsection 357-25(8)]
1.60 An amount arising from the operation of Division 815 or the application of
Part IVA of the ITAA 1936, which includes the General Anti-Avoidance
Rules, the Multinational Anti-Avoidance Law and the Diverted Profits Tax, is
excluded from benefiting from the patent box concession and will be subject to
the applicable tax rate for the entity.
[Schedule 1, item 1, paragraph 357-25(1)(c)]
11
Patent box
Income attributable to patents
1.61 A reasonable apportionment of the patent box income stream attributable to the
underlying patents for each income stream must be worked out so as best to
achieve consistency with:
• the OECD Transfer Pricing Guidelines, or
• if relevant, the OECD Model Tax Convention on Income and Capital,
together with its commentaries, in respect of Article 7; and
• a document or part of a document prescribed by the regulations, so as
to enable amendments to the above documents to be adopted as
necessary.
[Schedule 1, item 1, subsections 357-25(1) and (6)]
1.62 This amount should be directly derived from the value of the embedded patent
itself to the extent that it contributes to the overall value of the therapeutic
good.
[Schedule 1, item 1, subsection 357-25(1)]
1.63 Where the patent does not account for the entire value received for the good,
the income unrelated to the patent must be separated from the income derived
from the patent. A medical device may have an embedded patent in the form of
certain technology, but the value of that device may also be attributable to the
hardware, branding, marketing and other embedded patents held by
competitors and licenced by the taxpayer.
1.64 Where, for example, ordinary income derived from the sale of therapeutic
goods may be attributable to the marketing and manufacturing of those
therapeutic goods, as well as the underlying patent, it is only the reasonable
apportionment of this income attributable to the patent that is intended to
benefit from the patent box regime.
1.65 This reasonable apportionment approach requires the taxpayer to identify the
portion of the patent box income stream that is attributable to the underlying
patent in a manner that best achieves consistency with the relevant OECD
documentation outlined above.
1.66 In addition, this resulting apportionment must also achieve consistency with
the object of Division 357, which is to encourage innovation and
commercialisation of patented inventions in the medical and biotechnology
industry to be undertaken in Australia by taxing income derived from those
patented inventions concessionally.
Example 1.1
Thomas Corp develops and manufactures medical devices,
including developing potential uses for a new textile (Textile A).
12
Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
Thomas Corp establishes a new manufacturing technique that can
be used to apply Textile A to certain surfaces. Thomas Corp does
not hold a patent over the manufacturing technique for the
application of Textile A, as this would require it to disclose the
manufacturing process to competitors.
Thomas Corp, when developing a new widget determines that
Textile A may be suitable for use as an outer layer for the widget,
due to this new manufacturing technique. A prototype of the widget
is developed that includes the layer of Textile A, which
significantly increases the widget's durability and flexibility. The
widget is then patented, included on the ARTG as a medical device
and sold en masse to the public. The unique manufacturing process
is not covered by the patent to ensure it remains a trade secret. The
increase in durability and flexibility of the widget allows Thomas
Corp to sell their widget at a higher price than other similar
products on the market.
Thomas Corp must determine a reasonable apportionment of their
sales income from these medical devices that is directly attributable
to the eligible patent, as opposed to income generated from other
assets and activities (such as manufacturing and marketing
activities), that best achieves consistency with the OECD Transfer
Pricing Guidelines. The portion of the sales income attributable to
manufacturing, including the development and exploitation of
manufacturing know-how (in relation to Textile A), would not be
eligible for the patent box. The income arising from the patent box
income stream is also reduced by the increased value of the final
product - that is, how much of the price increase is attributable to
the use of textile A and the marketing regime. Only the income
directly attributable to the patent is eligible for the patent box.
Example 1.2
Timothy Pty Ltd manufactures pharmaceuticals and has developed
a new medication that has been registered on the ARTG. This
medication relies on four patents (Patents A, B, C and D).
Patents A, B and C are standard patents registered in Australia.
Patent A was granted in 2020 and is not eligible for the patent box.
Patent B is eligible as it was applied for in January 2021 and
granted on 12 May 2021. Timothy Pty Ltd is the exclusive licensee
of Patent C, and as such, they do not hold the patent and it is not
eligible for the patent box. Patent D is a United States Utility Patent
issued by the United States Patent and Trademark Office in June
2021 and is eligible for the patent box.
Timothy Pty Ltd must determine a reasonable apportionment of the
income stream for the medication attributable to Patent B and
Patent D so as best to achieve consistency with the OECD Transfer
13
Patent box
Pricing Guidelines. Any income attributable to Patent A and Patent
C, as well as income attributable to other assets or activities is not
eligible income for the purposes of the Patent Box. Only income
directly attributable to the eligible patents may benefit from the
patent box regime.
R&D fraction
1.67 The patent box regime must be compliant with the substantial activity
requirement under the BEPS Action 5 Report minimum standard for
intellectual property regimes (IP regimes). To satisfy the substantial activity
requirement, the nexus approach ensures a link between the benefits of an IP
regime and the extent that the underlying R&D that generated the intellectual
property was undertaken by the taxpayer in Australia.
1.68 The nexus approach requires an R&D fraction to be used as a measure of the
taxpayer's involvement in the R&D conducted to develop the eligible patent.
This fraction is applied for each patent box income stream to limit the income
that can benefit under the patent box. That is, the taxpayer benefits under the
patent box to the extent that the taxpayer conducted the R&D in Australia.
[Schedule 1, item 1, subsections 357-25(1) and 357-30(1)]
1.69 In accordance with the BEPS Action 5 Report, the R&D fraction only includes
R&D expenditure incurred by the entity; it does not include all of the R&D
expenditure incurred in the development of the patent. Therefore, a taxpayer
who undertook the R&D themselves in Australia to develop the patent would
have a R&D fraction of 100 per cent.
1.70 A taxpayer who acquired the patent or outsourced the development of the
patent to a related party, where the R&D was undertaken overseas, would have
a ratio of less than 100 per cent.
R&D fraction formula
1.71 For the purposes of the Australian patent box regime, the R&D fraction for an
amount arising from a patent box income stream of a taxpayer for an income
year is worked out under the formula:
𝐴
× 1.3
(𝐴 + 𝐵 + 𝐶)
A: is the sum of the total amounts of the taxpayer's notional deductions
for R&D expenditure in respect of a qualifying patent or patents, with an
adjustment to ensure the full cost of depreciation assets are included in the
income year in which the costs are incurred.
B: is the total expenditure incurred in respect of a qualifying patent or
patents on R&D activities conducted outside of Australia by one or more
associates of the R&D entity, regardless of whether these activities are
14
Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
covered by a finding in force under paragraph 28C(1)(a) of the Industry
Research and Development Act 1986.
C: is the total cost of each depreciating asset in respect of which the
taxpayer can deduct an amount under Division 40 for the income year
attributable to the qualifying patent or patents. While costs attributable to
commercial, legal or administrative aspects of patenting relating to
patented inventions that the taxpayer has developed in Australia itself are
excluded from this component of the R&D fraction, these costs relating to
patents acquired by the taxpayer are included in this component.
[Schedule 1, item 1, subsections 357-30(1) and (2)]
1.72 An uplift of 30 per cent is then applied to the fraction. This uplift, however,
only applies to the extent that the numerator does not surpass the denominator
as the R&D fraction is capped at one. The R&D fraction is cumulative,
including all R&D expenditure from previous years.
[Schedule 1, item 1, subsections 357-30(1) and (5)]
1.73 The R&D fraction is applied to each patent box income stream following the
reasonable apportionment in accordance with the OECD transfer pricing
principles to determine the eligible patent box income for that stream.
1.74 The numerator in the R&D fraction captures only the R&D expenditure
incurred by the taxpayer for R&D activities undertaken in Australia and
excludes expenditure covered by a paragraph 28C(1)(a) finding. Rather than
the decline in value of R&D assets, the expenditure includes the total cost of
assets incurred by the taxpayer.
[Schedule 1, item 1, subsections 357-30(1) and (2)]
1.75 The 30 per cent uplift to the fraction accords with the BEPS Action 5 Report,
which allows taxpayers who incur R&D expenditure to acquire a patent or to
outsource R&D activities overseas to a related party to uplift their R&D
expenditure by up to 30 per cent.
1.76 This uplift is designed to avoid taxpayers from being excessively
disadvantaged for acquiring intellectual property or outsourcing some R&D
activities overseas to related parties. The uplift cannot, however, result in the
numerator exceeding the denominator as the R&D fraction is capped at one.
[Schedule 1, item 1, subsection 357-30(5)]
1.77 The denominator of the R&D fraction includes the taxpayer's R&D
expenditure as well as the total costs incurred for R&D activities conducted
outside of Australia by associates and the cost of acquiring a patent developed
by someone else.
1.78 The R&D formula provides a jurisdictional approach to determine the total
amount of R&D undertaken within Australia by the taxpayer.
1.79 Rather than including deductions for the decline in value of assets in the R&D
fraction, the OECD requires a cumulative approach to expenditure. This means
15
Patent box
that expenditures are to be included in the R&D fraction at the full acquisition
cost at the time incurred.
Additional rules for the R&D fraction
1.80 For the definition of C in the denominator of the R&D fraction, an integrity
rule can apply to alter the cost of an asset held by the R&D entity. This rule
applies if at the asset acquisition time, the R&D entity was not dealing at arm's
length and the asset's cost was less than its market value.
[Schedule 1, item 1, subsection 357-30(3)]
1.81 The integrity rule applies to deem the first element of the R&D entity's cost to
be the market value of the asset (as opposed to its ordinary cost under
Subdivision 40-C). This integrity rule only applies for the purpose of the
definition of C in the R&D fraction.
1.82 For completeness, under the existing uniform capital allowance rules, where
the asset's cost exceeds its market value, item 8 to the table in subsection
40-180(2) alters the first element of the asset's cost to be the market value.
1.83 This integrity rule does not apply where an R&D entity holds a depreciating
asset that has been split into two new depreciating assets and the cost is
determined under section 40-205.
[Schedule 1, item 1, subsection 357-30(4)]
1.84 This exclusion ensures that the cost of the new assets for the purposes of the
definition of C in the R&D fraction is a reasonable proportion of the sum of the
adjustable value of the original asset and the cost of splitting the original asset
into the new assets.
R&D activities
1.85 Only expenditure incurred for the purpose of actual R&D activities in the
development of a qualifying patent can constitute qualifying expenditure for
the purposes of the R&D fraction. This includes expenditure eligible for the
R&D Tax Incentive.
1.86 Using these existing R&D Tax Incentive concepts means that taxpayers are
already subject to record-keeping obligations to substantiate their R&D
expenditure; this also ensures compliance with the BEPS Action 5 Report
documentation requirements.
1.87 Under the R&D Tax Incentive, R&D activities consist of core R&D activities
and supporting R&D activities. Core R&D activities consist of experimental
activities that take place for the purpose of generating new knowledge or
information. Supporting R&D activities are activities that are directly related to
core R&D activities. An activity is a supporting R&D activity only if it is
undertaken for the dominant purpose of supporting core R&D activities.
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
1.88 Expenditure that cannot be directly linked to the qualifying patent, such as
building costs and the costs of patenting the innovation, including legal fees
and application fees, are not qualifying R&D expenditure. General and
speculative R&D expenditure, however, can be pro-rated across qualifying
patents with which the expenditure has a direct link.
1.89 Outsourcing clinical trials to a related party overseas may diminish the patent
box income that qualifies for concessional tax treatment. The exception in the
R&D Tax Incentive that permits necessary R&D activities that cannot be
carried out in Australia, for example where there is no market in Australia in
which to undertake the clinical trials, to qualify for the R&D Tax incentive
does not extend to the patent box regime.
1.90 In accordance with the OECD BEPS Action 5 Report, expenditure on overseas
R&D activities does not qualify for the patent box. This aims to ensure that the
regime is not considered to be a harmful tax practice.
Patent box non-assessable non-exempt (NANE) fraction
1.91 The patent box provides an effective tax rate of 17 per cent to the income
received from the exploitation of a patent in the medical and biotechnology
sectors that is attributable to the taxpayer's development of that patent in
Australia, regardless of the taxpayer's applicable corporate tax rate.
1.92 The amount of each patent box income stream remaining after applying the
R&D fraction is multiplied by the patent box NANE fraction. The patent box
NANE fraction is 17 per cent divided by the corporate tax rate of the taxpayer
subtracted from 1.
[Schedule 1, item 1, subsections 357-25(1) and (7)]
1.93 The amount in respect of each patent box income stream remaining after
applying the R&D fraction and patent box NANE fraction is taken to be
non-assessable non-exempt income of the taxpayer. Making this portion of
patent box income non-assessable non-exempt income achieves an effective
tax rate of 17 per cent in respect of this income.
[Schedule 1, item 1, subsections 357-25(1) and (7)]
Corresponding treatment of deductions relating to patent box
income stream which is NANE
1.94 The effect of making a portion of the patent box income non-assessable
non-exempt income is that the taxpayer will no longer be entitled to claim
deductions to the extent that their loss or outgoings are incurred in gaining or
producing that non-assessable non-exempt income. This is a direct result of the
operation of the general deduction provision and other specific deduction
provisions.
17
Patent box
Consequential amendments
1.95 Schedule 1 Part 2 makes minor consequential amendments to the ITAA 1997
that include inserting the patent box regime as table items in sections 10-5 and
11-55 and inserts the definitions used in Part 1 in subsection 995-1(1).
[Schedule 1, items 3 and 4, section 11-55 and subsection 995-1(1)]
Application and transitional provisions
1.96 The Bill commences on the first quarterly period to occur following the day
Royal Assent is received.
1.97 The amendments apply to patents granted or issued after 11 May 2021 in
respect of income years starting on or after 1 July 2022.
[Schedule 1, item 5, section 357-1 of the Income Tax (Transitional
Provisions) Act 1997]
18
Statement of
Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny)
Act 2011.
Treasury Laws Amendment (Tax Concession for Australian Medical
Innovations) Bill 20222
Table of Contents:
Overview .............................................................................................. 19
Human rights implications .................................................................... 19
Conclusion ........................................................................................... 20
Overview
2.1 The Bill is compatible with the human rights and freedoms recognised or
declared in the international instruments listed in section 3 of the Human
Rights (Parliamentary Scrutiny) Act 2011.
2.2 The Bill amends the ITAA 1997 to introduce concessional tax treatment for
ordinary and statutory income derived by a corporate taxpayer from exploiting
a medical or biotechnology patent for income years commencing on or after
1 July 2022. This is referred to as the Australian patent box regime.
2.3 Where the taxpayer meets the eligibility criteria for the patent box regime,
income directly attributable to the eligible patent will benefit from being
subject to an effective income tax rate of 17 per cent, to the extent that the
taxpayer undertakes the R&D of that patent in Australia.
2.4 The objective of the patent box regime is to encourage investment and
innovation in Australian medical and biotechnology industry. The regime aims
to provide an incentive for businesses to undertake their R&D and to
commercialise their patented inventions in Australia.
Human rights implications
2.5 The Bill does not engage any of the applicable rights or freedoms.
19
Statement of Compatibility with Human Rights
Conclusion
2.6 The Bill is compatible with human rights as it does not raise any human rights
issues.
20
Attachment 1: Regulation Impact
Statement
Table of Contents:
Executive Summary ............................................................................. 22
Problem ......................................................................................... 22
Recommendation .......................................................................... 27
Consultation, implementation and evaluation ................................ 28
Problem ............................................................................................... 29
Multinational tax minimisation ....................................................... 29
Onset of foreign patent boxes ....................................................... 29
Australia's IP tax competitiveness is not favourable ...................... 30
Impact on medical and biotechnology R&D ................................... 31
Impact on medical and biotechnology commercialisation.............. 32
The OECD global minimum tax will limit the problem, but not
eliminate the problem .................................................................... 33
Patents are closely linked to innovation ........................................ 34
Overall Problem ............................................................................ 35
Options and Impacts ............................................................................ 36
Retain the status quo - no patent box (Option 1) .......................... 36
Implement announced budget proposal (Option 2) ....................... 37
Further design options for Option 2 ............................................... 38
Implement modified version of announced proposal (Option 3) .... 46
Recommendation ................................................................................. 48
Overall impact ............................................................................... 48
Overall Recommendation .............................................................. 51
Consultation ......................................................................................... 53
21
Regulation Impact Statement
Six-week public consultation on patent box for medical and biotech
sector ............................................................................................ 53
Outcomes of targeted consultation on exposure draft legislation .. 57
Implementation and evaluation ............................................................ 59
References .......................................................................................... 60
Attachment A - Comparison of 'patent box' regimes of United Kingdom,
Switzerland and Singapore (technical options) .................................... 61
Attachment B: Patent box rate and design........................................... 67
Attachment C - IP Australia patent fees (IP Australia website) ........... 72
Executive Summary
The purpose of this Regulation Impact Statement(1) is to provide an estimate of the
policy and regulatory impacts of Australia adopting a 'patent box' in the medical and
biotechnology sectors. A patent box is a policy tool that provides a reduced corporate
tax rate on income generated from particular types of qualifying intellectual property
(IP), particularly patents. Under the proposed patent box, the intention would be to tax
corporate income derived from eligible Australian patents in the medical and
biotechnology sectors at a concessional rate effective from 1 July 2022.
Problem
Over the last 20 years, a number of factors have emerged that have worked to
disincentivise the development and retention of IP assets in Australia's tax jurisdiction,
along with the R&D operations that underpin them. Two key factors are:
• Quite significant reductions in corporate tax rates overseas. Australia's
corporate tax rate has moved from below the Organisation for
Economic Co-operation and Development (OECD) average to be 3rd
equal highest in the OECD - and well above the OECD average.
• In addition to this, patent box regimes with very low effective tax rates
are becoming more common amongst comparable developed
economies.
While these issues are not unique to the medical and biotechnology sector, they appear
to have a significant impact in this sector. Certainly, this industry has been the most
active in advocating for a patent box with a competitive concessional rate on eligible
patents. This industry also has experience with patent box regimes in other
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
jurisdictions and has indicated it can comply with the regulatory burden consistent with
other foreign patent box regimes.
For the above reasons, in the 2021-22 Budget the Australian Government announced
its intention to introduce a patent box regime for the medical and biotechnology sector,
and that it would consult with industry on the design of the patent box prior to making
a final decision on the regime.
The Government also announced it would consult on whether to expand the announced
patent box proposal to the clean energy (or low emissions) sector. Views from
stakeholders on the inclusion of low emissions and clean energy technologies are not in
scope for this RIS as the Government has not made any policy decision on their
inclusion.
Options and impacts
There are three broad options available to the Government in responding to the
problem:
• Option 1: Do not implement a patent box regime - retain the status
quo.
• Option 2: Implement the announced patent box regime.
• Option 3: Implement a modified version of the announced patent box
regime, whose design takes into account feedback from consultation
with industry on the announced regime.
The Government's approach was to announce a high-level patent box (Option 2) in the
2021-22 Budget, with the following proposed design elements to determine which
investments can access the concessional tax regime:
• the patent box regime will be ringfenced to the medical and
biotechnology sector;
• an effective concessional tax rate of 17 per cent for companies on
eligible profits from eligible patented inventions;
• only inventions claimed in standard patents granted by IP Australia,
which were applied for after the Budget announcement (that is, have a
priority date after 11 May 2021), will be eligible;
• only eligible income from 1 July 2022 would be in scope; and
• the patent box will be designed to be consistent with the OECD/G20
Forum on Harmful Tax Practice (FHTP) framework governing IP
regimes, including the OECD's Base Erosion and Profit Sharing
(BEPS) Action 5 minimum standard (specified in the BEPS Action 5
Report).
As part of the announcement, the Government indicated it would consult closely with
industry on the design of the patent box. This led to the development of Option 3,
23
Regulation Impact Statement
which is a modified version of Option 2 in key ways to reflect the outcomes of
consultation with industry.
Eligibility start date
Following the Budget announcement, feedback from consultation and further analysis
into the lifecycle of patents revealed long lead times to developing and
commercialising patents in the medical and biotechnology sectors. Reflecting this,
Option 3 proposes to expand the eligibility criteria to patents granted after
11 May 2021 (and therefore, some patents which may have been applied for before).
Patent filing location flexibility
Stakeholders also noted that a significant number of their Australian designed medical
patents are filed overseas, and not with IP Australia. This is due to the relatively
smaller market size of the Australian consumer base in contrast to larger jurisdictions
such as the US and EU.
Limiting the patent box to just Australian patents would make income for some
Australian-designed innovations ineligible, or require businesses to go through the
extra compliance burden and expense of filing a patent in Australia in order to gain
eligibility. Therefore, Option 3 proposes to extend eligibility to the regime to patents
filed under two equivalent IP frameworks overseas, while maintaining the requirement
that underlying R&D expenditure occurred in Australia.
Other high-level design elements
Consultation with industry and further analysis following the budget announcement did
not identify practical proposals to modify the proposed rate, starting income year,
industry boundary or the decision to comply with BEPS Action 5. As such, these
design specifications are identical under Options 2 and 3.
Design options to consider for Option 2
This RIS considers three broad options. However, a patent box is a generic term for
any tax regime that is concessional for income derived from IP. There are significant
and discrete but not mutually exclusive options for the design of the patent box that
will affect its regulatory and compliance impact. These options were influenced by
consultation and are summarised below (evaluated in body of report).
Rate
The 17 per cent rate was chosen for the initial announcement because it provides a
13 percentage point discount on Australia's headline rate of 30 per cent, which is a
similar discount provided by other patent box regimes. The Government was also
mindful of the OECD's intention to ensure Multinational Enterprises (MNEs) will be
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
subject to a minimum tax rate (which has now been announced at 15 per cent which
will be imposed from 2023). Stakeholders did not identify a compelling case to adopt a
different tax rate, hence the original 17 per cent rate has been incorporated into both
Options 2 and 3.
Industry ringfence
Consultation revealed a preference among taxpayers to leverage existing legislation to
define the sector. Stakeholders suggested and preferred using the Therapeutic Goods
Administration's (TGA) Register of Therapeutic Goods as the vast majority of medical
and biotechnology patents are embedded in goods on that register. This approach
provides certainty to stakeholders and the Government, and avoids the need to create a
new bespoke definition of 'medical' in the tax legislation that both the ATO and
taxpayers would be unfamiliar with. Both Option 2 and Option 3 require that for
income to be eligible, it must be income from a patent for a good on the TGA Register
of Therapeutic Goods.
IP Development conditions
The OECD BEPS Action 5 Report requires 'substantial activity' to be undertaken by a
taxpayer within the tax jurisdiction offering the preferential tax regime. The patent box
design will comply with the OECD guidelines to ensure the regime is not deemed a
harmful tax practice by the OECD. If the patent box was to be deemed harmful, other
jurisdictions may implement measures to deter their nationals from investing in
Australia. Consultation involved collaboration with the OECD FHTP Secretariat. This
significantly reduces the risk that the FHTP member jurisdictions, which are advised
by the Secretariat on whether regimes are harmful tax practices, will raise concerns
with the regime at a later date. The FHTP will not formally consider Australian patent
box legislation until it is adopted as Australian Government policy in its final form.
Form of Tax Relief
Some countries provide patent box tax relief through a lower bespoke rate targeted to
eligible patent box income. Others apply their normal headline rate to eligible income,
but reduce the final tax that would otherwise be payable by waiving a portion of the
final tax bill or through inflated expense deductions. In the Australian context, the
Offshore Banking Unit previously provided a 10 per cent effective concessional rate on
certain banking activities through what is known as an apportionment approach or
Non-Assessable Non-Exempt Income (NANEI) approach. In the patent box context,
this approach makes part of the income NANEI to achieve the effective tax rate of
17 per cent. To comply with the OECD's rules on deductions being claimed at the
same rate as income, the NANEI approach must also be applied to expenses incurred in
producing the eligible patent. This approach is likely to satisfy the OECD FHTP
members and was shared with stakeholders during targeted consultation. It has
therefore been included under both Option 2 and 3.
25
Regulation Impact Statement
Qualifying IP income
The OECD requires eligible income to be streamed so that only income attributable to
the eligible patent is treated concessionally. The common types of income associated
with patents reflect both revenue earned from licensing the patent or capital gains
proceeds from the sale of the patent (along with damages from infringement). In
consultation it was proposed that these forms of income be included in the scope of
eligible income, which was supported by stakeholders.
Apportioning eligible income
Firms often do not sell their patent or license it directly, instead they often embed their
patent into a product. The OECD BEPS Action 5 guidelines require that legislation
must outline a method for entities to determine the income attributable to the eligible
patent, separating that stream of income from other income streams derived from the
final embedded product (e.g. income attributable to marketing).
There is the option to use transfer pricing principles to attribute the income. These
determine an 'arm's length return' for pricing transactions within and between
enterprises under common ownership or control. In the context of the patent box, this
allows for the value attributable to the eligible IP to be determined via self-assessment
by the taxpayer, which is then submitted to the ATO via a tax return.
There is also the option to use simplified transfer pricing mechanisms that provide
formulaic assumptions. For instance, the UK Patent Box assumes a 10 per cent return
on certain specified non-IP costs, and excludes this amount from the concessional
treatment. This approach is also used albeit via a different mechanism in Switzerland
(see Attachment A).
Stakeholder feedback indicated a preference for a simplified transfer pricing approach
as it provides more certainty and lower compliance burdens by avoiding the need for
detailed analysis of the economic substance of each stage in the development,
manufacturing and marketing of multiple product lines. However, the full transfer
pricing approach is recommended by the OECD (albeit that other approaches are
acceptable) and would deliver outcomes commensurate with the facts and
circumstances of each transaction, more closely targeting the benefits from the patent
box towards the commercialisation of research and development performed in
Australia. As such, both Options 2 and 3 propose the full transfer pricing approach.
Qualifying (Eligible) Taxpayer
The BEPS Action 5 minimum standard reduces the scope of qualifying taxpayers to
resident companies, domestic permanent establishments (PEs) of foreign companies
and foreign PEs of resident companies subject to tax in the jurisdiction that provides
the benefits. Consultation with stakeholders supports the use of the R&D Tax
Incentive's (R&DTI) definition of an eligible R&D Entity to determine who is eligible
for the patent box as it is well understood by stakeholders. Both Options 2 and 3 reflect
this approach.
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
Recommendation
Option 3 is the preferred option as it improves Australia's tax competitiveness for
medical commercialisation decisions in relation to patents granted after Budget night
2021-22. In contrast Option 2 would not be relevant to patents for another 4 to 6 years
based on the average lead time between patent application and grant. Option 3 will
impose a lower regulatory burden due to its recognition of patents registered in some
foreign jurisdictions, reducing the potential for Australian patent applications being
made for tax purposes only.
Both Options 2 and 3 help to mitigate the effect of Australia's high corporate tax rate,
and incentivise Australia's medical and biotechnology businesses to develop and
commercialise their innovations in Australia instead of overseas. At its maturity, an
estimated 816 medical and biotechnology firms would be able to access the patent box
under either option, generating additional economic activity and high-skilled jobs in
Australia, with flow-on benefits across the economy. Option 3 has a stronger economic
benefit than Option 2, as it applies to patents granted, not just patents applied for, after
announcement date, and to patents granted in certain jurisdictions overseas.
There are two types of benefits from implementation of a patent box:
• the first is the increase in R&D activity arising from the greater
incentive to produce eligible patents for patent box purposes. This has
flow on benefits, for instance a November 2021 CSIRO working
paper(13) notes that for every $1 increase in R&D investment, a $3.50
return can be expected (before consideration of social benefits).
• In terms of spillovers, a 2006 Productivity Commission study(7) found
that R&D investment results in roughly a 25 per cent spillover benefit
outside of the sector of investment. Not having a patent box, therefore,
means Australia is also missing out on the positive externality benefits
associated with any potential forgone R&D investment.
While the compliance burden under both Options 2 and 3 is significant (see Table 1),
the patent box regime is optional and benefits participating businesses. Its proposed
design has been developed in consultation with industry, and the compliance burden is
broadly in line with other patent box regimes.
The ATO has provided an estimate of compliance costs as set out in Table 3. The
regulatory cost borne by individuals (including consumers) and community
organisations is estimated to be $0.
Moreover, the ATO has advised that Option 3 would have lower non-tax compliance
costs than Option 2 as businesses would not be required to maintain a patent in
Australia in order to access the concession (if they already have a patent in the EU or
US). Note however that non-tax costs are not captured in the quantified assessment as
27
Regulation Impact Statement
the ATO has not been able to quantify them1. Option 3 therefore offers an advantage of
lower non-tax compliance costs than Option 2 without compromising the integrity of
patents allowed into the regime since the EU and the US respective patent offices have
comparable patent examination standards to IP Australia.
Table 1: Estimated compliance costs (Option 2 and 3)
Implementation $5,077,131
Ongoing (per annum) $1,697,060
Aggregate impact over 10-year $22,047,728
duration
Per year (10 years) $2,204,773
This preferred option put forward for Government decision is estimated to decrease the
underlying cash balance by $120 million over the forward estimates period. This policy
costing only takes into account the direct effects of a policy change and does not
include broader economic or 'second-round' effects as detailed in the Charter of
Budget Honesty Policy Costing Guidelines.
Consultation, implementation and evaluation
Treasury released a discussion paper on the design of the patent box on 5 July 2021 as
part of its six-week public consultation process. In its consultation paper, Treasury put
forward 29 discussion questions to inform the design of the patent box and the
Government's understanding of its impact. Treasury approached selected stakeholders
ahead of the release of the discussion paper to ensure the questions were informed and
covered the key design issues.
Approximately 48 written submissions were received from a range of stakeholders,
including in the medical and biotechnology industries, low emissions sector, tax
advisory firms, Commonwealth agencies and universities. The variety and volume of
submissions received indicated a high level of interest in the policy.
In December 2021, Treasury conducted targeted consultation on draft legislation to
further inform the proposed specifications and seek feedback on the practical operation
of the proposed regime prior to the Government making a final decision.
The ATO will be responsible for administering the regime. ATO Taxation Statistics
data will be provided to Treasury so that the take up of the regime can be understood
over time.
1
However, we note that the fees of maintaining a patent in Australia are around $45,000 over
the life of a patent (refer to Attachment C).
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
Problem
Multinational tax minimisation
Commercial businesses generally exist to maximise after-tax returns to shareholders.
Consideration of the tax implications of where and in what form business investments
should be made is a normal business consideration alongside non-tax factors that will
affect expected returns.
Shifting operations offshore to take advantage of improved business conditions (tax or
otherwise) is not straightforward and usually entails increased short term capital
investment, investment risk and disruption for the entity. But it also allows the entity to
realise more of a tax saving in the long term (and potentially other benefits) relative to
keeping operations in the original, but higher tax, jurisdiction. This benefit may
outweigh the costs depending on how the risks eventuate.
There are number of factors that influence these decisions, including each jurisdiction's
overall tax burden (rate and other aspects), access to relevant infrastructure, the ability
to protect IP, availability of relevant skills, distance to market, policy risk from a
jurisdiction's levels of Government and other factors.
The lawful shifting of economic activity for tax benefits is not to be confused with the
problem of 'profit shifting' where firms enter into arrangements with related parties in
another jurisdiction to shift profits to low or no tax jurisdictions artificially (that is,
irrespective of their economic activities). That said, a lower tax rate does reduce the
attractiveness of profit shifting.
Onset of foreign patent boxes
A patent box is a tax regime that provides a lower tax rate for certain kinds of income
derived from certain forms of intellectual property (IP). Patent boxes typically apply
only to patents, but sometimes includes other forms of IP such as designs and
copyright material. An increasing number of foreign jurisdictions have introduced
patent boxes to increase their tax competitiveness specifically for IP, some of which
are called intellectual property boxes, innovation boxes or IP boxes.
The first patent box was introduced by Ireland in 1973. In the 1990s and 2000s a
succession of countries introduced patent boxes, including France, Belgium, the
Netherlands, Luxembourg and Hungry. The concept soon spread beyond Europe, with
Israel and Korea becoming the first to introduce patent boxes outside Europe.
The United Kingdom introduced its patent box in 2012, and shortly thereafter the
OECD began negotiations on guidelines that would remove harmful aspects of existing
regimes, as part of its broader Base Erosion and Profit Shifting programme. This
resulted in the Action 5 report, which included amongst other things a substantial
activity requirement, to minimise the 'poaching' of IP (the offshoring of IP that was
29
Regulation Impact Statement
developed in another jurisdiction at significant cost and risk). The requirement applied
to new entrants from 1 July 2016 and all claimants from 1 July 2021.
While removing harmful aspects of patent boxes, thereby making IP less mobile in the
short term, the Action 5 report has not slowed the growth of IP tax competition, with
Switzerland, Singapore, Poland and China amongst the countries that have since
introduced patent boxes. Currently, over twenty jurisdictions have patent boxes,
including eighteen OECD member states.
Australia's IP tax competitiveness is not favourable
Much of Australia's innovation is embedded in IP assets because they provide both a
means for investor ownership to be legally understood and provide those investors
competitive protection by assigning monopoly rights to the holders of the IP assets for
a period of time. The offshoring of these assets is a loss of innovation to another
jurisdiction as well as a loss of these monopoly profits from Australia's tax
jurisdiction.
The comparatively high Australian headline corporate income tax rate, relative to other
OECD countries, and the numerous low-rate patent box regimes in other jurisdictions,
means there is an incentive for IP that would otherwise be developed in Australia to be
developed and retained offshore. This risk has already grown - and is growing -
because Australia's general company rate has not fallen with its peer nations (see
Figure 1, 2000 vs current), and concessional patent box regimes are becoming more
common (see Attachment B).
Figure 1: OECD corporate tax rates (2000 and current rates)
Source: OECD Revenue Statistics 2021. Note: All listed rates are
combined central and provincial government company tax rates.
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
In the context of taxation of IP, both the general corporate tax rate and (if applicable)
the patent box rate matters to a country's tax competitiveness for IP investments,
because patent box regimes do not cover all income associated with a patented product
(this is explained in the discussion of OECD rules in Section 3 Options and Impact).
On average, OECD countries with a patent box regime have headline corporate tax
rates of 22 per cent and provide effective concessional rates of 8 per cent for IP income
- a difference of 14 percentage points (see Table 2). Attachment B has more details.
As the concessional rates are on average 22 percentage points lower than Australia's
headline corporate tax rate, some taxpayers argue Australia's taxation of IP income is
not competitive without a patent box.
Table 2: Average IP regime rates and corporate rates
OECD Members All regimes
IP Rate (per cent) 8 6
Corporate Rate (per cent) 22 22
Difference (percentage points) 14 16
Notes: The above table has been updated for changes to the headline corporate tax rate in France
(27.5 in 2021) and the 'Innovation Box' rate in Netherlands (9 per cent). It excludes the United
States FDII regime, which is not considered a patent box, and Switzerland, as the effective rates
differ substantially between Cantons and we do not have this information. It also excludes
regimes that have recently been abolished. The OECD data covers IP regimes reviewed by the
Forum on Harmful Tax Practices (FHTP).
Source: OECD Intellectual Property Regimes, Treasury
Impact on medical and biotechnology R&D
Australia already has substantial and well-established programs to support R&D,
including the Research and Development Tax Incentive (R&DTI). Nevertheless,
Australia places below the OECD average in terms of total government support to
business R&D as a percentage of GDP(2). Medical and biotechnology firms have
stressed that Australia's lack of tax competitiveness for IP assets, resulting from its
high corporate tax rate and not having a patent box, is an important factor that limits
their ability to further expand their Australian R&D capabilities.
ResMed, for example, stated the following in its submission on the patent box:
ResMed grows its research and development (R&D) expenditure globally by 7 to
8%. ... However, without a patent box, it has been increasingly difficult for
ResMed to choose Australia for new, incremental innovation investment over
other jurisdictions.
Cochlear, likewise, stated the following in its submission on the patent box:
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Regulation Impact Statement
As Cochlear's business and global footprint continues to grow we have greater
flexibility in where we conduct R&D whether alongside current R&D capacity in
Belgium, Sweden or the United States or co-located with new manufacturing
facilities in Malaysia and China. These countries, and many others, actively and
aggressively compete for our R&D and manufacturing investment by offering a
suite of investment incentives including, in more than 20 other countries, patent
boxes. ... The design of the new Australian patent box will be an important
factor in making these [investment location] decisions.
These themes were repeated throughout the patent box submissions that Treasury
received from medical and biotechnology firms. Firms argued that tax competition
particularly impacts their marginal decision making on R&D operations - while the
lack of a patent box will not lead to the immediate deterioration of the sector, they
argue that it inhibits the sector's growth and potential.
There have been no academic studies analysing the impact of patent boxes on R&D
investment following the introduction of the OECD substantial activity requirement,
likely reflecting that the transition to the new regime has only just been finalised, and
relevant data is not yet available. However, a 2019 UK government report(3), which
includes data for the period after the introduction of the substantial activity
requirement, found that 'firms using the patent box display an approximate 10 per cent
increase in investment'. While the report highlights the limitations of the early data,
this initial finding broadly supports the submissions of Australian medical and
biotechnology firms.
In terms of marginal decision making, this evidence suggests that if the Government
does not establish a patent box to compete with foreign equivalents, Australian
multinationals will be less likely to focus their growth domestically, foreign
multinationals will have less reason to establish research centres in Australia, and it
will be more difficult for domestic start-ups to secure investment.
As well as directly growing the economy and creating jobs, it has long been recognised
that R&D investment has significant positive externalities for broader society. For
example, a 2006 Productivity Commission study(7) found that R&D investment results
in roughly a 25 per cent spill-over benefit outside of the sector of investment. Not
having a patent box, therefore, means Australia is also missing out on the significant
positive externality benefits associated with any potential forgone R&D investment.
Impact on medical and biotechnology
commercialisation
Once initial R&D has been completed and IP protection has been granted, firms have
the option to offshore their IP before further developing the product for
commercialisation. This is particularly relevant in the medical and biotechnology
sector, where significant further development is required after a product is patented.
For example, products such as the chemical composition of a vaccine are often
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
patented before safety and efficacy are demonstrated (e.g. stage I, II, III & IV clinical
trials), regulatory approval is sought (e.g. from the TGA) or complex manufacturing
processes are devised (e.g. disposable mixing paths and fluid systems).
Australia currently has no specific incentives or regulations from federal, state or local
governments to encourage the retention of Australian-designed IP ownership in
Australia during commercialisation. This means Australian medical and biotechnology
innovations are at risk of being offshored and may be sensitive to Australia's
uncompetitive taxation of IP income. Given that significant returns are not realised in
the sector until after commercialisation is completed, offshoring results in loss of tax
revenue for Australia.
Medical and biotechnology firms argue that the lack of a patent box is causing the
ownership of Australian-developed IP to be offshored during commercialisation.
AusBiotech, the peak body for many firms in the sector, stated the following in its
submission on the patent box:
The Patent Box is intended as an incentive for companies to make long-term
decisions and create long term value for Australia ... . For example, it is well
accepted that as a product reaches commercialisation, the benefits of the much-
valued R&D Tax incentive (RDTI) diminish, the development of highly portable
IP may (and does) move the associated benefits offshore, where other countries
benefit. An Australian Patent Box incentive would work 'hand in glove' with the
RDTI to keep more of the value creation and its benefits in Australia, for longer.
This notion of 'additionality' is key to the Patent Box creating an incentive to
change and improve the outcomes we might otherwise have.
A number of studies have confirmed that patent boxes affect the location of IP
ownership(4,5,6). For example, the Institute for Fiscal Studies estimated that foreign
patent boxes had caused a 30 per cent decline in UK patent ownership before the UK
patent box was introduced(5). While these studies all rely on data from before the
introduction of the OECD's substantial activity requirement, the impact of patent boxes
will continue to some extent - the substantial activity requirement minimises the ability
of patent boxes to incentivise the onshoring of foreign IP, yet still allows patent boxes
to disincentivise the offshoring of domestic IP.
The OECD global minimum tax will limit the problem,
but not eliminate the problem
In the context of competing taxation regimes and profit shifting, the OECD/G20
Inclusive Framework Pillar 2 project seeks to set an effective global minimum
corporate tax rate at 15 per cent. The OECD's stated objective for Pillar Two is that it
seeks to ensure that all large and internationally operating businesses pay at least a
minimum level of tax globally. This will help address the problem of countries
continuing to lower tax rates in order to compete for investment.
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Regulation Impact Statement
The Government announced at the 2021-22 Budget that Australia's patent box rate
would be set at 17 per cent in anticipation of public discussion at the time of a global
minimum rate. The global minimum rate will likely be calculated broadly, accounting
for both income eligible for the patent box rate and the headline rate. Other tax
measures which reduce the effective tax rate also can pull an entity's rate to close or
below the global minimum. If this were to occur, the OECD's mechanism to recapture
the undertaxed revenue would likely lead to a tax revenue transfer to another country.
That is, if Australia does not tax the income at 15 per cent, another nation will receive
a taxing right for that untaxed amount for no tax competitiveness advantage (as the
entity still pays 15 per cent overall). The Government indicated to stakeholders that the
OECD/G20 Inclusive Framework Pillar 2 would be a key consideration in the context
of the design of the patent box.
Patents are closely linked to innovation
IP is knowledge owned as an intangible asset. Australia has six different categories of
legally enforceable IP:
• Patents: protection of inventions and processes. Patents are granted by
IP Australia if there is evidence of the invention or process being new,
inventive and useful. Standard patents provide protection for up to 20
years.
• Trademarks: protection of packaging and branding. Trademarks are
granted by IP Australia, but no evidence is required of it being unique
or new. Trademarks provide indefinite protection.
• Registered designs: protection of the visual appearance of products.
Registered designs are granted by IP Australia if there is evidence of
the appearance being new and distinctive. Registered designs provide
protection for up to 5 years.
• Plant breeder's rights: protection of new plant varieties. Plant breeder's
rights are granted by IP Australia if there is evidence of the variety
being a new or recently exploited. Plant breeder's rights provide
protection for up to 20 or 25 years.
• Copyright: protection for the owner's expression of an idea, but not the
idea itself. Copyright is claimed rather than granted. The Department
for Industry, Transport, Regional Development and Communications
has responsibility for copyright law. Generally, copyright provides
protection for up to 70 years.
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
• Circuit layout rights: protection for integrated circuits used in
computer generated equipment. Circuit layout rights are claimed rather
than granted. The Department for Industry, Transport, Regional
Development and Communications has responsibility for circuit layout
rights law. Circuit layout rights provide protection for up to 10 years
after commercial exploitation.
Source: IP Australia website
A patent is a right that is granted for any device, substance, method or process that is
new, inventive and useful. To be granted a standard patent, the patent holder must
satisfy an inventive step.
Extract from IP Australia patent application process
Your invention must: Be new, useful and involve an inventive step.
The application should A title, description, any number of claims, drawings (if
include: applicable), an abstract and forms.
A patent is granted if: The application is examined and found to satisfy the relevant
requirements of the Patents Act 1990.
Examination: Mandatory. The relevant requirements of the Patents Act
1990 must be met before a patent is granted. Can only be
requested by the applicant.
Publication in 18 months from earliest priority date and again at acceptance.
the Australian Official
Journal of Patents:
Protection period: Up to 20 years if annual fees are paid (or up to 25 years for
pharmaceuticals).
How long does the process Six months to several years depending on circumstances.
take?
Source: IP Australia website
The other forms of IP do not require the applicant to demonstrate an inventive step, as
is required for patents. Thus, while some of the previously discussed problems may
apply to other forms of IP, the effect of not having a patent box on R&D investment
will most acutely be felt by patent holders.
Overall Problem
Due to the proliferation of patent boxes in other jurisdictions, Australia's high
corporate tax rate has become a particular problem in relation to the taxation of IP
income. Not introducing a patent box in Australia has impacted decisions in the
medical and biotechnology sector, both in terms of reduced R&D investment and the
offshoring of Australian innovations before commercialisation. The introduction of a
35
Regulation Impact Statement
global minimum tax will reduce, but not eliminate, this problem, which is most
pertinent for patents rather than other forms of IP.
Options and Impacts
Policy options and their impacts have been included in this section. Following a description
of each policy option, the trade-offs of each option and an overall assessment of the net-
benefit is included the Recommendation section.
There are several options the Government could pursue to address the problems raised,
within the context of the Government's intention to consult on and design a targeted
patent box regime. Option 1 is to not introduce a patent box, that is, retain the status
quo. Option 2 is to introduce a patent box consistent with the Government's proposed
specifications as announced at the 2021-22 Budget and further details as informed by
consultation. Option 3 is to introduce a modified patent box, reflecting feedback from
stakeholders on the initial proposed design.
Other non-tax options exist, such as providing grants or other direct forms of funding
to incentivise the retention and development of IP within Australia. These options
would not address Australia's tax competitiveness as outlined in the problem
definition. While there are advantages and disadvantages of using the tax system to
incentivise innovation, the tax system has an advantage over Government spending
options in that taxpayers can self-assess their eligibility (subject to the usual ATO audit
process) and would not be subject to Government decisions on the eligibility of each
unique investment.
To inform its policy design of the patent box, the Government carried out a 6 week
public consultation as well as two targeted confidential consultations with stakeholders
(see Section 4 Consultation). This informed the different policy options described
below.
Retain the status quo - no patent box (Option 1)
The Government has the option of not introducing any new measures to make the
taxation of IP income in the medical and biotechnology sector more competitive.
As detailed in the previous section, this would continue to affect marginal decisions
about the location of investment, contributing to IP offshoring and diminished R&D in
the Australian medical and biotechnology sector. This would impact the effectiveness
of existing government programmes supporting R&D. In the long-term, this could
potentially lead to a reduction in the Australian medical and biotechnology sector's
global significance, and the sustained loss of tax revenue, economic activity, and
skilled jobs. There is no evidence, however, that this will affect the price or
accessibility of patented pharmaceuticals in Australia.
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
There is some academic support for such an option. In November 2015, the Melbourne
Institute and the then Department of Industry, Innovation and Science released a paper
on patent box policies across the world(7). This paper suggested that there are 'no solid
theoretical or empirical grounds for claiming that patent box regimes induce more
innovation.' Further, 'a policy aimed at attracting mobile IP income is a winner takes-
all policy and therefore requires an aggressive lowering of the headline tax rate'. (7)
However, this analysis was completed before the OECD's rules (described in Section 3
Option and Impact) were implemented. No significant studies have been completed
since.
Maintaining the status quo would impose no compliance costs in Australia as it would
not require changes to legislation and companies would not have to learn or implement
a new regime. However, companies choosing to relocate their IP to access patent boxes
in other jurisdictions would be subject to the associated relocation and compliance
costs.
Implement announced budget proposal (Option 2)
To seek to address the problems identified with the status quo, the Government
announced it would consult on a high-level patent box proposal in the 2021-22 Budget.
The announcement included a number of proposed design elements to determine which
investments could access the concessional tax regime and which industry sectors
would be in scope. These are:
• the patent box regime will be ringfenced to the medical and
biotechnology sector;
• an effective concessional tax rate of 17 per cent for companies on
eligible profits from eligible patented inventions;
• only inventions claimed in standard patents granted by IP Australia,
which were applied for after the Budget announcement (that is, have a
priority date after 11 May 2021), will be eligible; and
• the patent box will be designed to be consistent with the OECD/G20
Forum on Harmful Tax Practice (FHTP) framework governing IP
regimes, including the OECD's Base Erosion and Profit Sharing
(BEPS) Action 5 minimum standard (specified in the BEPS Action 5
Report).
The BEPS Action 5 requires a nexus between any eligible IP and the R&D leading to
that IP's development. Affected taxpayers would be required by BEPS Action 5 to
record R&D activities to later prove where and by whom the R&D activity was
conducted.
Therefore, an Australian patent box cannot be designed to incentivise existing offshore
IP (where the R&D underlying that R&D was developed offshore) to be moved to
Australia. A regime with that intent would be deemed non-compliant by the OECD
FHTP (further details in Section 3).
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Regulation Impact Statement
Option 2 considers the merits of implementing the Government's Budget
announcement with no changes to the announced specifications, and with the
additional required design elements not set out in the budget announcement to be
informed by consultation with industry.
The Government also announced it would consult on whether to expand the proposed
patent box to the clean energy (or low emissions) sector. Views from stakeholders on
the inclusion of low emissions and clean energy technologies are not in scope for this
RIS as the Government has not made any policy decision.
Rate
The tax rate is proposed to be set at 17 per cent, which provides a broadly similar
discount to the headline corporate tax as other patent box jurisdictions. It also
minimises the risk of tax shortfalls being imposed by other jurisdictions in future,
depending on the outcome of the OECD/G20 global minimum tax (see Section 2
Problem).
Eligibility start date
The aim of the patent box is to incentivise new investment in the development of new
patents.
Therefore, under this option, eligible patents are those applied for after 11 May 2021,
and any patents in development that were applied for before 11 May 2021 would be
ineligible. This would ensure that the concessional rate would only apply to new
patents and would not reward existing investment that has already occurred.
Patent filing locations
Under this option only patents filled through IP Australia would be eligible. IP
Australia's patent examination standards are well understood by stakeholders. Any
increase in the filing of patents through IP Australia owing to the patent box would not
require a funding increase for IP Australia as it is a cost recovery agency (applicants
fees fund IP Australia's output).
Further design options for Option 2
'Patent box' is a generic term for a tax regime that provides concessional treatment of
income attributable to intellectual property. Different design choices will lead to
significantly different regulatory and compliance impacts. To consider how to
implement Option 2, there are many design choices that have a large bearing on the
regulatory and policy impact that were not addressed in the 2021-22 Budget.
These are the issues raised by the OECD as key design issues and by stakeholders in
the industry. There is a large overlap between the issues raised below and the issues
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
raised by consultation. All of these design options were influenced by consultation and
are evaluated below. More details on insights collected from consultation can be found
at Section 5.0 Consultation.
Codifying Industry boundary
Consultation revealed a strong preference for using an existing definition of the
medical and biotechnology sectors, rather than creating a bespoke definition.
Stakeholders overwhelmingly suggested using the TGA's Register of Therapeutic
Goods to determine which patents would qualify for the patent box as the vast majority
of medical and biotechnology patents are embedded in goods on that register.
This definition is a widely used and understood definition that provides certainty to the
vast majority of stakeholders. The Government confirmed with TGA that this would be
a workable definition.
This has the additional benefit that tax legislation does not need to make distinctions
about the efficacy and safety of medical products. The decision about whether a
product is appropriate to be used in a medical setting at any point in time will be solely
based on assessments under the Therapeutic Goods Act.
Design a regime compliant with OECD framework governing
IP regimes
Patent boxes regimes are known for being complex to design and administer as one
part of an entity's income (the income related to the eligible patent) needs to be
isolated and identified to allow it to receive concessional tax treatment, while normal
tax treatment applies to rest of the entity's income.
Rules governing what can be exposed to the concessional tax treatment need to be clear
to taxpayers and be administrable for the ATO. Concessions also create tax integrity
issues because the regime creates an incentive for taxpayers to inflate the income
attributable to the patent box (which is not the intent of the policy) or underinflate
expenses, both of which inflate profit attributable to the regime.
The Government's Budget announcement noted that the patent box will be designed to
be consistent with the OECD/G20 Forum on Harmful Tax Practice (FHTP) framework
governing IP regimes, including the OECD's BEPS Action 5 minimum standard. This
includes the requirement that the concessional tax treatment will only apply to
company profits from patented inventions in proportion to the amount of associated
R&D that was conducted in Australia by the entity. Figure 2 outlines the topics where
the OECD takes a view on design in their report titled: 'OECD/G20 Base Erosion and
Profit Shifting Project Action 5: 2015 Final Report: Countering Harmful Tax Practices
More Effectively, Taking into Account Transparency and Substance' (the BEPS Action
5 Report) (8).
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Regulation Impact Statement
Figure 2: Key design dimensions of IP regimes
(Source: OECD)
If the regime was found to be a harmful tax practice by the OECD FHTP, then it is
likely that Australia would also be listed on the EU List of Non-Cooperative Tax
Jurisdictions for Tax Purposes. This listing risks sanctions from any EU member state,
including higher withholding taxes, denying deductions and double taxation for
Australian persons and entities. The Government has reduced this risk as much as
possible by engaging extensively with the FHTP's Secretariat, which advises the FHTP
on whether regimes are harmful tax practices.
Eligible IP
Some patent box regimes include wider types of IP (see Attachment A). This option
prioritises legally defined IP that is confirmed to entail an inventive step, namely,
standard patents granted by IP Australia. This is because standard patents are the type
of IP primarily used by firms in the medical and biotechnology sector to protect their
innovations, and such innovations (involving an inventive step) are associated with
genuine economic activity in the form of research and development and manufacturing.
IP Development conditions
As part of the OECD's substantial activity requirement, the nexus approach creates a
link between the benefits of a patent box and the extent that the underlying R&D that
generated the intellectual property was undertaken by the taxpayer in the home
jurisdiction. The BEPS Action 5 report specifies that the nexus approach, which is a
combination of existing transfer pricing rules and an R&D fraction, must be used to
limit the amount of patent income which can receive concessional treatment in a patent
box.
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
Each patent box income stream has its own R&D fraction, and income is multiplied by
the R&D fraction before receiving concessional treatment. This means that benefits
under a patent box must decrease where the taxpayer does not conduct the R&D itself,
but either outsources R&D activities to a related party overseas or acquires intellectual
property developed by another party. The mechanism to implement the R&D fraction,
as specified in the BEPS Action 5 Report, is in Figure 4 below. In conjunction with the
R&D fraction, transfer pricing prevents the taxpayer from benefiting from the patent
box to the extent the R&D was conducted overseas by one of its permanent
establishments. This means that, in principle, a taxpayer can only benefit from the
patent box to the extent the underlying R&D was undertaken by the taxpayer in
Australia, which protects profits from being shifted artificially overseas where value is
created in Australia.
Figure 4: Nexus fraction as specified by the BEPS Action 5 Report
Countries are open to define R&D expenditure for the purpose of the R&D fraction in
a variety of ways. For instance, there is the option to leverage existing regimes that
already administer R&D activities. Option 2 leverages the R&DTI as a basis for
determining qualifying R&D expenditure. This is intended to provide taxpayers with a
means to apply the nexus fraction through the existing R&D legislative framework.
This approach limits the overall compliance burden and ensures the benefit provided
by the patent box is proportional to the R&D that the taxpayer has undertaken in
Australia. Given the cumulative effect of the R&D Tax Incentive and the patent box,
similar to other patent box regimes, the benefit available under the patent box may be
reduced where the outcome is misaligned with Australia's commitment to the OECD's
two-pillar solution for addressing the tax challenges of the digital economy.
The OECD FHTP permit countries to take either an entity or jurisdictional approach
for their R&D fraction calculations, the difference being that a jurisdictional approach
permits domestic related party costs to be included in the fraction's numerator while
the entity approach does not. Option 2 follows a jurisdictional approach. The FHTP
Secretariat has advised the numerator cannot include costs attributable to overseas
clinical trials, regardless of whether an entity or jurisdictional approach is used, despite
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Regulation Impact Statement
these being included as eligible expenditure under the R&DTI under certain
circumstances.
The OECD allows a 30 per cent uplift, which is implemented by the 1.3 factor placed
in the numerator of the fraction (see Attachment A). Option 2 includes this factor in the
fraction because some clinical trials cannot be conducted in Australia due to the lack of
expertise, access to equipment, quarantine regulatory requirements, capacity
constraints within the supply chain and low population size in Australia.
Qualifying IP income
The common types of income associated with patents reflect both revenue earned from
licensing of the patent or capital gains proceeds from the sale of the patent (along with
damages from infringement). Consultation proposed these forms of income as the
scope of eligible income, which was supported by stakeholders. The Government's
discussion paper specifically proposed that the following forms of IP income will be
eligible for the patent box:
• Proceeds from the sale of the IP asset
• License fees
• Sale of products using the IP asset (embedded goods)
• Damages for infringement
• Other compensation (from infringement)
Stakeholders raised that income attributable to patents is often earned before a patent
product goes to market or even before a patent is granted. Option 2 therefore allows
these payments (known as 'milestone payments') to be included in the patent box.
Apportioning eligible income
The OECD requires eligible income to be streamed so that income attributable to
marketing is removed. The Government's announcement provides for income
attributable to the eligible patent to be treated concessionally.
Firms often do not sell their patent or license it directly, instead they often embed their
patent into a product. Therefore, the patent box legislation must outline a method for
entities to determine the income attributable to the eligible patent, separating that
stream of income from other income streams derived from the final embedded product
(e.g. income attributable to marketing).
There is the option to use transfer pricing principles to attribute the income. Transfer
pricing refers to the rules and methods for pricing transactions within and between
enterprises under common ownership or control. Due to the potential for cross-border
controlled transactions to distort taxable income, tax authorities in many countries can
adjust intragroup transfer prices that differ from what would have been charged by
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
unrelated enterprises dealing at arm's length (this is known as the arm's-length
principle).
There is the option to use simplified transfer pricing mechanisms that provide
formulaic assumptions. For instance, the UK uses a 'cost plus methodology' to
determine the value attributable to eligible IP. The UK Patent Box assumes a 10 per
cent return on certain specified costs as representative of the returns to non-IP. The
'cost plus amount' is removed from the taxable income that benefits from the UK's
concessional rate and is instead exposed to the headline rate. This approach is used by
Switzerland, but delivered via a different mechanism (see Attachment A).
Stakeholder feedback indicated a preference for a simplified transfer pricing approach.
However, the full transfer pricing approach is recommended by the OECD FHTP
Secretariat and provides the highest level of integrity. Formulaic approaches provide
more certainty to taxpayers, but often rely on a fixed assumption regarding the
proportion of income attributable to patents - this may undervalue the IP of some
taxpayers and overvalue the IP of others. Transfer pricing mechanisms rely on the facts
and circumstances of each transaction to determine to attribute the income.
There is a trade-off between, on the one hand, minimising uncertainty and compliance
costs for taxpayers and administration costs for the ATO with, on the other hand,
ensuring that taxpayers can only claim access to this generous concession to the extent
merited by their economic activities. On balance, Option 2 proposes the full transfer
pricing approach as it would ensure that the benefits from the patent box are more
closely targeted towards the commercialisation of eligible research and development
performed in Australia, consistent with the Government's intended purpose for the
regime.
IP tax base: Expenses and losses
The BEPS Action 5 Report requires that the tax rate at which expenses and losses are
deducted must align with the tax rate at which IP income is taxed. This is known as the
symmetrical treatment of income and expenses.
A practical implication of this rule is that expenses associated with generating eligible
patents would have to be recorded and then deducted at the effective 17 per cent rate.
R&D spending that underpins a patent sometimes precedes the patent income by 10
years or more. This requirement reduces the concessionality of the regime and makes
compliance complex for taxpayers and administration resource intensive for the ATO.
For this reason, Option 2 proposes to leverage the R&DTI regime for determining
R&D expenses. Background on the R&DTI regime is below.
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Regulation Impact Statement
Short Primer on the R&DTI regime
The research and development (R&D) tax incentive encourages companies to engage
in R&D benefiting Australia, by providing a tax offset for eligible R&D activities. It
has two core components:
- a refundable tax offset for certain eligible entities whose aggregated turnover is less
than $20 million
- a non-refundable tax offset for all other eligible entities.
The ATO and the Department of Industry, Innovation and Science (on behalf of
Innovation and Science Australia) jointly administer the R&D tax incentive. Taxpayer
R&D activities must be registered with the Department of Industry, Innovation and
Science before the tax offset is claimed, and the ATO determines if the expenditure
claimed in the taxpayers tax return for their R&D activities is eligible for the tax offset.
For patent box purposes, both core and support R&D activities (defined below) that
relate to the eligible patent are included in the nexus fraction.
- Core R&D activities are experimental activities where it is not possible to know or
determine the outcome in advance on the basis of current knowledge, information or
experience. They involve a systematic progression of work, using principles of
established science.
- A supporting R&D activity is one that is directly related to core R&D activities or,
for certain activities, has been undertaken for the dominant purpose of supporting core
R&D activities. Activities that must satisfy the dominant purpose requirement are those
that produce or are directly related to producing goods or services or are excluded from
being core R&D activities.
(Source: ATO and AusIndustry websites)
Tax relief (extent and form)
Some countries provide patent box tax relief through a lower bespoke rate targeted to
eligible patent box income (e.g. UK patent box rate is 10 per cent). Others apply their
normal headline rate to that income, but reduce the final tax that would otherwise be
payable (e.g. Switzerland reduces the tax that would otherwise be payable by 90 per
cent for one canton).
As described above in Section 1.2.1 (page 7), in the Australian context, the Offshore
Banking Unit previously provided a 10 per cent effective concessional rate on certain
banking activities through the NANEI approach.
This approach makes part of the income NANEI to achieve the effective tax rate.
Using this approach would require Australia to comply with the OECD's rules on
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
deductions being claimed at the same rate as income, meaning the NANEI approach
must also be applied to expenses incurred in the development of the eligible patent.
Option 2 proposes using the NANEI approach as it has been previously used
effectively in concessional tax regimes.
The BEPS Action 5 report established that ongoing IP expenses also need to be
deducted from IP income prior to the application of the concessional tax rate. The rules
ensure contemporaneous symmetry in the treatment of IP expenses and income, while
achieving symmetry between the treatment of income independent of whether it refers
to an ongoing profit or a loss.
This symmetry would be achieved by Option 2 because expenses incurred in
developing and maintaining eligible patents undergo the same NANEI approach as
income. Part of the expense amount (i.e. deductions) is made NANEI which effectively
reduces the tax value of deductions associated with the eligible patent from 30 per cent
to 17 per cent (i.e. taxpayers deductions are worth 17 cents in the dollar instead of 30
cents in the dollar).
Qualifying (Eligible) Taxpayer
After the introduction of the BEPS Action 5 minimum standard, the scope of
qualifying taxpayers was reduced to resident companies, domestic permanent
establishments (PEs) of foreign companies and foreign PEs of resident companies
subject to tax in the jurisdiction that provides the benefits. The OECD note that IP
regimes may vary regarding the type of firms to which the regime applies.
The two most common company vehicles for storing patents in Australia are a
company or a trust. Patents are sometimes not stored in the company that has done (or
is doing) the underlying R&D that led to that patent.
Option 2 leverages the definition of an eligible entity available in the R&DTI regime.
To be an eligible patent box entity, the taxpayer must satisfy the requirements as
defined in the R&DTI regime. The definition of an R&D entity for R&DTI purposes is
described below.
You are an R&D entity if you are a corporation that is any of the following:
• incorporated under an Australian law
• incorporated under a foreign law but an Australian resident for income
tax purposes
• incorporated under a foreign law and you are both
• a resident of a country with which Australia has a double tax
agreement that includes a definition of 'permanent establishment'; and
• carrying on business in Australia through a permanent establishment as
defined in the double tax agreement.
(Source: ATO website)
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Regulation Impact Statement
This provides synergies with the R&DTI regime as stakeholders overwhelmingly
reported that they already satisfy the requirements of the R&DTI regime, including the
entity definition. It also allows foreign corporates who develop R&D in Australia to
qualify. This provides broad coverage of the entities currently engaged in R&D
operations in Australia.
Electing into the patent box
A design parameter giving consideration to the costs of compliance associated with the
patent box is to allow entities to choose whether to opt into the patent box. This would
allow an eligible entity to determine its likely eligibility, analyse the costs and benefits
of electing into the patent box, and choose whether and when to elect into the patent
box.
This is in line with other tax regimes, namely, the consolidation regime.
Implement modified version of announced proposal
(Option 3)
Option 3 was developed after the 2021-22 Budget announcement and following public
consultation. It modifies Option 2 to take into account feedback from consultation on
the proposed specifications that were part of the Government's initial announcement.
The approach taken to consider modifications included:
• ensuring new investments in commercialisation activities are
adequately captured so that the policy intention of incentivising new
commercialisation investment is achieved;
• reducing compliance costs to access the regime (where possible); and
• responding to design issues considered a priority by stakeholders
themselves.
In line with this approach, the Government was presented with two key modifications
from the Option 2 design basis (to form Option 3).
Eligibility start date
Further analysis into the lifecycle of patents following the Budget announcement
revealed long lead times to developing and commercialising patents in the medical and
biotechnology sectors. This was supported by feedback from a significant number of
stakeholders during consultation that the product development cycles are particularly
long in the medical and biotechnology sector.
Reflecting these concerns, Option 3 proposes to expand the eligibility criteria to
patents granted (and therefore, some patents which may have been applied for before)
after 11 May 2021.
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
Regulatory and policy impact from policy modification
The policy impacts will be greater under option 3 than option 2 as this approach
benefits more patents in development, with an increased cost to revenue.
Public consultation revealed that entities generally apply for patent protection for new
inventions early in the invention's development. Consultation with IP Australia
indicated there is a strong incentive to patent early in the R&D cycle because failure to
do so could result in someone else patenting the invention first.
There are long product development cycles in the medical and biotech sectors post
patent application, with consultation with stakeholders and Treasury research
suggesting that the average time from initial research and development to licensing and
regulatory approval is on average 3-7 years for medical devices and 9-12 years for
pharmaceutical products(10). IP Australia data indicates a 4-6 year time period exists on
average between filing patent applications and (if successful) their granting by IP
Australia.
Stakeholders therefore noted that the patent box as announced in Budget would not
impact their operations until many years after the start date because patents applied
after 11 May 2021 would not be commercialised until the development cycles were
completed. Allowing patents applied for up to 4-6 years ago essentially allows for the
capture of more new patents currently in development into the patent box regime. By
expanding the eligibility criteria to capture patents applied for prior to the Budget
announcement, but granted after the Budget announcement, more medical and
biotechnology products in the earlier stages of development would be incentivised to
commercialise in Australia.
Treasury research and consultations with IP Australia revealed that significant new
investment is required between patent application and the granting of a patent (given
patent application occurs early). This policy specification will incentivise the
commercialisation of more early-stage patents in Australia but does run the risk of
rewarding investment that would have occurred in Australia anyway. Both Option 2
and Option 3 would incentivise locating in Australia the investment that is required
after a patent is granted to embed a granted patent into a product.
Patent filing locations
Option 2 applies to patents filed in Australia. Option 3 instead proposes to expand
patent registration criteria to include equivalent patents granted under the Convention
on the Grant of European Patents or by the United States Patent and Trademark Office
(USPTO).
The patent filing location can be separate to where it is developed and where it is
owned. There is often no commercial need to seek patent protection in Australia even
where the patent was developed in Australia. A patent holder will seek patent
protection in large markets because failure to do so allows a competitor to replicate the
invention and compete in that jurisdiction. This would be very costly in large markets
such as the EU and the US. Not filing in Australia involves the same risk, but the
47
Regulation Impact Statement
Australian market is comparatively small such that some firms may not seek patent
protection here, considering the time and costs involved of earning and defending a
patent if necessary.
In consultation, stakeholders confirmed that a significant number of their Australian
designed medical patents are filed overseas, and not with IP Australia. This is due to
the relatively smaller market size of the Australian consumer base in contrast to larger
jurisdictions such as the US and EU. Further, IP Australia advises that while 75 per
cent of medical patents filed by Australian applicants were filed with IP Australia, this
increases to 97 per cent once filings in the EPO (known as patents granted under the
Convention on the Grant of European Patents) or USPTO are included. IP Australia
also advises that the EPO and the USPTO have similar patent approval standards to IP
Australia.
Regulatory / policy impact from modification
Including patents filed by Australians with the EPO and USPTO would provide
comprehensive coverage of Australian patents in the sector while recognising that
adding additional jurisdictions would increase the risk of including a jurisdiction that
lowers its patenting standards in the future.
• In terms of compliance saving, this policy specification saves
businesses who use the patent box patent application and registration
fees in Australia for patents already granted by the USPTO or under
the Convention on the Grant of European Patents. The IP Australia
patent fee schedule is available at Attachment C.
• From a policy perspective, this option would maintain the objectives of
the patent box in targeting patents developed in Australia, because the
research and development activity underlying the patent would still
need to be conducted in Australia - it is only the location of filing, not
the location of patent development, that has been modified.
Recommendation
Overall impact
This section examines the impact of the three options through a number of lenses:
regulatory impact; budget impact; policy impact and risks and disadvantages. Overall,
it finds Option 3 to be the preferred Option.
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
Regulatory Impact comparison
A patent box has high compliance costs for companies wishing to access the lower tax
rate. However, these costs can be significantly reduced by leveraging some of the
compliance requirements businesses already incur to claim the R&DTI or meet the
TGA requirements. Participation in the patent box regime is optional, so firms whose
costs are high relative to the benefits may elect not to take advantage of the concession.
It should also be noted that if Australia did not have a patent box (Option 1) and
businesses chose to shift patents offshore to take advantage of patent boxes in other
jurisdictions, they would be subject to the compliance costs of these jurisdictions'
regimes, as well as the costs associated with the relocation.
The requirement for R&D to occur within Australia requires companies to track R&D
expenditure and IP income to the IP asset. This requires detailed record keeping and
will need to be scrutinised by the ATO. Further, the patent box will only apply to
income earned from eligible IP and not income from marketing, manufacturing or
other intangible assets (e.g. manufacturing know-how). It is anticipated that this will
require complex transfer pricing or alternative calculation methods to be applied in
most instances. Such rules, or any alternative calculation method, will also
significantly increase compliance costs.
The regulatory costs of Option 3 are not expected to differ remarkably from the
announced design (Option 2) as the tax component of the compliance mechanisms for
each option are the same. The ATO has provided an estimate of compliance costs as set
out in Table 3. The regulatory cost borne by individuals (including consumers) and
community organisations is estimated to be $0.
However, the ATO has advised that Option 3 would have lower non-tax compliance
costs than Option 2 as businesses would not be required to maintain a patent in
Australia in order to access the concession. That said, non-tax costs are not captured in
the quantified assessment.
There would be little compliance saving gained by allowing medical products listed in
foreign TGA equivalent registers to be included in the patent box. Stakeholders
reported it is exceedingly uncommon for an Australian designed medical product to be
registered overseas (e.g. by the FDA in the US) but not in Australia (i.e. by the TGA),
unlike decisions around patent filing locations. This is because to sell a product in any
given jurisdiction, the entity is required to have regulatory approval from that
jurisdiction (i.e. from a TGA equivalent), but the patents that underpin the products can
be filed in any location. This is why the Government was presented with the option for
the patent box to only apply to medical products listed on the TGA List of Therapeutic
Goods (no foreign registers).
49
Regulation Impact Statement
Table 3: Estimated compliance costs (Option 2 and 3)
Implementation $5,077,131
Ongoing (per annum) $1,697,060
Aggregate impact over 10-year $22,047,728
duration
Per year (10 years) $2,204,773
The impacted population estimates of small, medium and large companies were
derived by the ATO's Revenue Analysis Branch using the list of Australian Business
Numbers (ABN) holding relevant patents provided by Treasury. The number of hours
required for each taxpayer to adapt to the proposal was then estimated based on the
qualitative assessment of the proposal's impacts and a compliance cost survey
conducted in 2015. The total number of hours are multiplied by an OBPR rate of
$73.05 per hour to arrive at the compliance cost estimates.
Policy Impact Comparison
A patent box (Option 2 or 3) would help retain high value IP in Australia. The
proposed patent box would make Australia's tax settings more competitive and reduce
the incentive for companies to offshore high value IP. Any offshoring that is prevented
would help to prevent the erosion of the corporate tax base. However, OECD
requirements prevent patent boxes from encouraging foreign-designed IP to relocate to
Australia.
A patent box would also encourage further R&D. Although currently an R&D leader,
Australia faces increasing global competition. By decreasing tax on IP-related income,
the patent box would increase the return on R&D investment. This would ensure that
over time Australia lost fewer R&D projects to other countries - and that where R&D
is supported through Australian government support, the return on government
spending on R&D would be increased (i.e. the patent box improves the efficacy of
R&DTI). As the proposal only applies to new IP, the patent box specifically
encourages R&D. The concessional rate would also encourage the patenting of existing
trade secrets, which would increase knowledge sharing. However, these proposals will
not directly encourage onshore production, marketing or branding of Australian
designed IP goods as the OECD rules mandate these income components be excluded.
Patent boxes focus on the commercialisation rather than initial investment. As a result,
they increase the after tax returns to successful innovations and hence make Australia a
more attractive location for these investments. Patent boxes do not provide benefits to
R&D that is not commercially successful. The R&DTI is an existing Australian tax
measure that provides a benefit to firms that undertake R&D in Australia, irrespective
of the commercial success of that R&D.
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
Evidence presented in Section 3 determined that additional in-development patents
captured in Option 3 (beyond those captured in Option 2) are likely to benefit early-
stage patents that still have commercialisation investment decisions pending, where tax
is a factor in determining whether the investment proceeds.
Risks and disadvantages
The patent box (Option 2 or 3) is likely to increase tax planning opportunities for
companies by providing a lower rate on certain income. Companies may attempt to
patent marginal innovations in order to have more income taxed at the lower patent box
effective rate rather than at the higher corporate tax rates (this income would have been
taxed at the relevant headline rate). This may erode corporate tax revenues and offset
some of the tax revenue gains from retaining higher value patents that might have
otherwise been offshored. That said, any marginal innovation would still need to
satisfy examination by IP Australia, which is an advantage of leveraging existing
regulatory standards.
Targeting the effective lower rate to income attributable to eligible IP will rely on
transfer pricing mechanisms. Taxpayers may end up in disputes with the ATO. That
said, the ATO is well practiced at administering transfer pricing rules to ensure
appropriate income attribution occurs. Most taxpayers engaged in overseas related
party dealings have experience dealing with the ATO on transfer pricing matters.
The OECD FHTP member jurisdictions may (via consensus) declare the patent box to
be not compliant with the Action 5 minimum standard, deeming it a 'harmful tax
practice'. This risk, however, is regarded as very low since the regime was designed
with the aim of following the OECD guidelines specified in the BEPS Action 5 Report
and there has been significant consultation with the Secretariat of the OECD FHTP.
For IP that would be commercialised in Australia regardless of the patent box,
companies would receive a tax windfall gain due to their access to the concessional
rate.
Overall Recommendation
The main benefits and costs of each option are depicted in Figure 5 below. As this
indicates, on balance, Option 3 is the preferred option. It addresses the identified
problem more effectively than Option 2 as it has a lower regulatory burden. It also
captures more new patents currently in development. Based on the factors identified in
the qualitative comparison in Figure 5, it is likely to have the strongest net positive
impact for Australia out of the three options.
Option 3 provides the highest likelihood that the patent box will achieve its aim. The
difference in the effective tax rate between Australia and other jurisdictions will be
reduced, as will the incentive to offshore valuable patents for a sector rich in patents.
This in turn should ensure that tax becomes less of a factor in medical and
51
Regulation Impact Statement
biotechnology businesses making decisions about where to conduct R&D and
commercialise successful patents.
RIS Heat Map Option 1 Option 2 Option 3
Status quo (no Budget Modified
concession) announcement proposal (design
proposal reflecting public
consultation on
Budget
announcement)
Improves
Australia's
international tax
competitiveness
Incentivises
research and
development in
Australia
Likely cost to
revenue
Increases regulatory
cost/compliance
burdens
Incentivises
commercialisation
in Australia
Figure 5: Heat Map summarising the net benefits of each option
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
Consultation
Six-week public consultation on patent box for medical
and biotech sector
Treasury released a discussion paper(9) on the design of the patent box on 5 July 2021
as part of its six-week public consultation process. Approximately 48 written
submissions were received from a range of stakeholders, including in the medical and
biotechnology industries, low emissions sector, tax advisory firms, Commonwealth
agencies and universities. The variety and volume of submissions received indicated a
high level of interest in the policy.
In its consultation paper, Treasury put forward 29 discussion questions to the public.
Treasury reached out to 12 stakeholders before releasing the discussion paper to test if
these questions were relevant for their sector and covered the key issues. The final
published questions focused on the following topics:
1. Eligible IP to enter the patent box
2. Targeting medical and biotechnology
3. Low emissions technologies
4. Applying the substantial activity requirement
5. Definition of R&D
6. Implementation and start date
7. Eligible revenue to enter the patent box
8. Subtraction of related patent expenses from eligible revenue
9. Treatment of losses and related offsets with the patent box
10. Administration and compliance
11. Other considerations
The full discussion paper can be found here:
https://treasury.gov.au/sites/default/files/2021-07/c2021_177849.pdf
While some of the views put forward by stakeholders were considered in line with the
policy intent and adopted into the proposed policy design for the patent box, several
other proposals were not incorporated as they were considered to bear disproportionate
integrity risks and potential revenue costs.
The key messages from stakeholders have been summarised below (views from
stakeholders on the inclusion of low emissions and clean energy technologies are not in
53
Regulation Impact Statement
scope for this RIS as the Government has not made any policy decision on their
inclusion). The issues raised overlap heavily with the key design options discussed in
the Option section.
Key themes from submissions
• Expand eligibility to include at least some patents applied for before
the Budget announcement.
• Expand eligibility to include patents filed outside of Australia in
certain foreign jurisdictions (on the basis of eligible R&D having been
undertaken in Australia before commercialisation).
• Expand eligibility criteria to include wider types of intellectual
property.
• Leverage the existing R&DTI regime as a nexus for compliance
purposes.
• Overseas clinical trials should be included in eligible R&D with
respect to the nexus fraction.
• Some form of manufacturing returns should be eligible for the patent
box concessional rate.
• Patent income should be grouped by a whole-of-product approach.
• Make the patent box concessional tax rate lower than 17 per cent.
Expand eligibility to include some patents applied for before
the Budget announcement.
Stakeholders conveyed that there are long product development lifecycles in the
medical and biotechnology sectors, with certain industry stakeholders claiming it takes
on average up to 9 - 12 years to develop pharmaceutical products(5). Consequently,
there was strong support for expanding eligibility dates for the regime from patents
applied for after 11 May 2021 (as announced at Budget) to an earlier date, or to patents
granted after 11 May 2021. Treasury considered this in designing the policy and is now
proposing that eligible patents be those granted after 11 May 2021 (meaning, they were
applied for prior to the date).
Expand eligibility to include patents filed outside of Australia in
certain foreign jurisdictions.
Stakeholders in the industry argued that limiting the patent box to patents filled in
Australia would exclude a majority of the commercialisation revenue of Australian-
owned IP.
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
Some stakeholders suggested that eligibility be expanded to include patents filed in the
IP5 jurisdictions (European Union, Japan, USA, South Korea, China), which together
handle around 85 per cent of the world's patent applications. However, most
stakeholders indicated that just expanding to the United States and European Union as
patent locations would capture most existing and emerging patents since they are the
largest markets.
IP Australia advised that patents filed under the European Patent Convention (UPC)
and with the United States Patent and Trademark Office (USPTO) face comparable
examination standards to patents filed under IP Australia. Examination from a patent
office ensures a potential patent contains the necessary inventive step to be granted as a
patent.
Expand eligibility criteria to include wider types of intellectual
property.
The inclusion of wider types of intellectual property and qualifying assets was
suggested by several stakeholders. Stakeholders pointed to foreign jurisdictions such as
the Netherlands which allows 'copyrighted software' as a qualifying IP asset in its
patent box regime. Other suggestions included expanding criteria to allow trade secrets
and plant breeders' rights in the patent box. The Government was presented with the
option to target the regime to patents only.
Leverage the existing R&DTI regime as a nexus for
compliance purposes.
Most stakeholders noted that the R&DTI framework is robust and appropriate for R&D
expensing purposes and that it would not be difficult to add another layer of analysis to
confirm that the expenditure would relate to a future patent or product that is
generating revenue. Some stakeholders simply noted that the R&DTI is a good starting
point for a compliance system.
However, there was also strong support for including overseas R&D which is
conducted either via an unrelated party or a 'positive advance' finding, and some
support for using a definition broader than the R&DTI to capture non-experimental
R&D. Stakeholders also provided insight into their record-keeping processes, noting
that large company processes can capture offshore R&D expenditure separately to
domestic R&D expenditure, although this is not always the case. One stakeholder
noted that all firms will need lead time to implement a system that adapts the R&DTI
expensing and recording system for patent box purposes. The Government was
presented with the option to leverage the R&DTI regime.
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Regulation Impact Statement
Overseas clinical trials should be included in eligible R&D with
respect to the nexus fraction
There was some support for overseas clinical trial costs undertaken in the R&D stages
of a project to be included in the R&D nexus fraction, where those trials could not be
conducted in Australia due to the lack of expertise, access to equipment, quarantine
regulatory requirements, capacity constraints within the supply chain and low
population size in Australia.
As stated in Section 3 Options and Impact, the Government was presented with the
option to not include overseas clinical trials owing to advice from the OECD Forum of
Harmful Tax Practices Secretariat that according to the BEPS Action 5 report, the
inclusion of overseas clinical trial costs in eligible R&D costs is not permitted. This
advice was received during targeted consultation.
Some form of manufacturing returns should be eligible for the
patent box concessional rate.
Nearly all industry stakeholders argued that including manufacturing returns in the
patent box would increase the policy impact of the measure. There was support in eight
submissions for providing the patent box concession to manufacturing activity.
It was noted that many stakeholders do not seek patents on its manufacturing
processes. Most manufacturing processes are kept highly confidential in the form of
trade secrets. It is generally difficult to enforce an IP right over a manufacturing
process when the use of that process is not identifiable in the finished product.
Patent income should be grouped by a whole-of-product
approach.
Stakeholders reported that most of their medical and biotech products comprise of a
group of related patented innovations. As such, these stakeholders supported the
adoption of a whole-of-product approach for grouping patent income. This would mean
that an entity's revenue flow from the sale of products and patent licencing could be
used as the starting point for determining eligible revenue.
It was contended that instead of carving apart a single product (and a single revenue
stream) into components, the R&D fraction (i.e. the "nexus ratio") should be applied
on a whole-of-product basis.
Make the patent box concessional tax rate lower than 17 per
cent.
Many stakeholders argued for a lower patent box rate, contending that the proposed tax
rate of 17 per cent is high by international patent box standards. Some stakeholders
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
were aware of the OECD global minimum tax rate discussions but argued the rate
should be lowered even if it were to fall below that, at least until the global minimum
rate is implemented.
Views on expanding patent box to low emissions sector
Treasury sought views on the potential expansion of the patent box to low emissions
technologies and whether it is an effective way to support the development of these
technologies in its discussion paper. The Government has not made any decision on the
inclusion of low emissions technologies in the patent box and therefore, views on it are
not included in this RIS.
Outcomes of targeted consultation on exposure draft
legislation
In December 2021, Treasury conducted targeted consultation on the patent box
exposure draft legislation with:
• three significant companies in the industry;
• the OECD Secretariat supporting the OECD FHTP; and
• three major accounting firms which provide tax advice to the relevant
industry.
Treasury received a variety of feedback and has implemented some changes to the
draft legislation to address feedback where necessary appropriate.
Feedback from industry stakeholders
All three industry stakeholders strongly supported the two significant expansions to the
patent box since the Budget announcement, these being the inclusion of patents issued
by the USPTO or granted under the EPC, and patents granted after 11 May 2021,
rather than only those applied for after this date.
All three stakeholders argued that a formulaic or safe harbour approach to determining
which income is eligible for the patent box is preferable to relying on OECD transfer
pricing principles. Notwithstanding this preference, all stakeholders understood that a
formulaic method would need to produce outcomes consistent with OECD transfer
pricing guidelines and would be concessional for some product-lines and punitive for
others, due to the unique nature and wide variation in the value of particular patents.
All stakeholders noted the legislation was highly complex.
In response to feedback from stakeholders, the Government was presented with the
option to make the following changes to the legislation:
57
Regulation Impact Statement
• Clarify the intended operation of the transfer pricing rules when
apportioning income attributable to eligible patents. This change will
increase flexibility as long as taxpayers make apportionments on a
'reasonable' basis.
• Adjust the wording around the link between patents and the
Therapeutic Goods Register (TGR) to ensure all relevant inventions
are captured. The exposure draft wording was unnecessarily narrow
and unclear where a good on the TGR is covered by multiple patents.
• Expressly provide for milestone payments to make it clear that such
payments are able to benefit under the patent box.
Feedback from the OECD Forum on Harmful Tax Practices
(FHTP) Secretariat
The OECD FHTP periodically conducts reviews of preferential regimes, such as patent
boxes, to determine if the regimes could be harmful to the tax base of other
jurisdictions. As a member of the OECD, it is important Australia complies with the
OECD guidelines as it is subject to these reviews.
Ensuring compliance with OECD guidelines was a key factor in the policy design of
Australia's patent box. Treasury consulted with the FHTP Secretariat to ensure the
patent box was compliant and to address any issues identified. The FHTP member
jurisdictions will decide on a finding of compliance or non-compliance for the regime
by consensus, after considering the FHTP Secretariat's analysis of the legislation.
Advice from firms which provide tax advice to industry
Treasury consulted with three major accounting firms who provide tax advice to
companies in the medical and biotechnology industry, and are therefore familiar with
the technical and operational implications of tax policy, as well as familiar with the
industry due to experience working with a range of companies in the medical and
biotechnology sectors. A fourth firm was contacted but was unavailable to engage.
The key messages received were:
• One firm expressed support for the 30 per cent uplift on qualifying
expenditure and noted it conformed to the OECD guidelines. It was
also noted that a large component of R&D expenditure is undertaken
offshore due to clinical necessities, and it was suggested that the
government reconsider applying a higher uplift factor to Australian-
based R&D, in contrast to the uplift provided to foreign R&D.
• A lack of clarity in a certain provision of the legislation relating to the
identification of patent box income stream was raised by another firm.
Consequently Treasury clarified the intent in the Explanatory
Memorandum for the legislation.
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
• One of the firms consulted noted that there is potential that the
compliance costs involved would be significant for a company that
elected into the patent box in light of the requirement that transfer
pricing principles be used. It was suggested that the legislation include
an option for companies to use a safe-harbour method or formulaic
approach.
Implementation and evaluation
The preferred option (option 3) will require legislative changes to Australia's tax laws.
In relation to implementation, the ATO would be responsible for administering the
regime in terms of reviewing and auditing tax self-assessments of taxpayers.
AusIndustry will maintain its role in determining whether an R&D activity is an
eligible R&DTI activity for all entities involved in the R&DTI regime whether or not
they are accessing the patent box.
The implementation of the policy will require record keeping updates for industry and
broadly require learning for each entity's Head of Tax. Companies below the Small to
Medium size threshold of $50 million will likely require advice from tax advisers.
The ATO will monitor the functionality of the patent box regime. Treasury will receive
feedback from stakeholders on the operation of the regime. Treasury will also continue
to work with the ATO to identify any integrity risks that may arise from the preferred
option, and to the extent such risks are identified, we would seek to progress
consequential amendments to ensure they are consistent with the policy intent.
In relation to Government implementation, all eligible entities will be able to elect into
the patent box, and ATO Taxation Statistics data will be provided to Treasury so that
the take-up of the regime over time can be understood.
A proposed implementation timeline is provided in Table 4.
Table 4: Proposed Implementation timeline
Approximate date Work Item
11 May 2021 (Budget night) High level Budget announcement of the patent box and
flagging consultation
June 2021 Pre-consultation with twelve stakeholders to inform the
upcoming consultation's discussion paper
5 July 2021 - 16 August Six weeks formal consultation period
2021
August - October 2021 Policy development
October - November 2021 Legislative design development
November - December 2021 Legislative drafting
November - December 2021 Consultation on legislative approaches
59
Regulation Impact Statement
Approximate date Work Item
10 January 2022 Q&A of the legislation and development of Parliamentary
introduction documents
8 February 2022 Legislative introduction
January - July 2022 Development of ATO guidance (ATO determine precise
timing)
1 July 2022 Start of first financial year of regime's operation
References
(1) Australian Government (2020), Guide to Regulatory Impact Analysis
(2) OECD: Measuring Tax Support for R&D and Innovation
(3) HMRC: Patent Box Evaluation
(4) Gaessler, Hall & Harhoff: Should there be lower taxes on patent
income?
(5) Institute for Fiscal Studies: Simulating the Effect of Patent Boxes
(6) Ciaramella: Patent Boxes and the Relocation of Intellectual Property
(7) Patent Box Policies (industry.gov.au)
(8) OECD Guidelines on BEPS Action 5: Harmful Tax Practices
(9) Treasury, Patent Box: Discussion Paper on Policy Design (July 2021)
(10)Drugs, Devices, and
...~https://www.sciencedirect.com/science/article/pii/S2452302X163
00183
(11)Submissions received in response to Treasury's Patent Box to be
made public on: Patent Box |
Treasur...~https://treasury.gov.au/consultation/c2021-177849
(12)Productivity Commission: Econometric Modelling of R&D and
Australia's Productivity
(13)CSIRO: Quantifying Australia's returns to innovation
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
Attachment A - Comparison of 'patent box'
regimes of United Kingdom, Switzerland and
Singapore (technical options)
Singapore -
United Kingdom Switzerland Patent Intellectual Property
Topic
Patent Box Box Development
Incentive (IDI)
1. Qualifying Qualifying IP assets Qualifying IP assets Qualifying Intellectual
IP assets include: include: property rights (IPRs):
• Patents granted • Swiss patents • A patent;
by the UK, EU • European • An application
or certain EEA patents with for a patent;
countries. designation of • A copyright
• Supplementary Switzerland; subsisting in
protection • Patents for software; or
certificates inventions in • A "family" of
granted by the other qualifying IPRs
UK or EU. jurisdictions, (see below).
• Plant breeders' utility models*; Family of qualifying
rights granted and comparable IPRs
by the UK or IP rights such Two or more IPRs may
EU. as be grouped into a
• Marketing supplementary "family" if either the
authorisation protection expenditure or the
granted under certificates and income of the IPRs
certain UK and regulatory data cannot be reasonably
EU regulations. protection for identified or separated
pharmaceutical from each other, i.e., it
Full details are in products and is interlinked. A "chain
sections 357BB and pesticides. rule" further applies
357BBA of the See Swiss legislation where two IPRs are part
Corporate Tax Act (OECD English of a chain of three or
2010. version) for full list of more qualifying IPRs
qualifying 'similar each of which is
rights'. interlinked with
another. The grouping
*Note: Utility Models of the family of IPRs is
are the equivalent of critical in the
Australian Innovation calculation of the nexus
Patents. ratio.
Note: Full details are
available in Singapore
legislation and
Regulations (known as
subsidiary legislation).
The subsidiary
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Regulation Impact Statement
Singapore -
United Kingdom Switzerland Patent Intellectual Property
Topic
Patent Box Box Development
Incentive (IDI)
legislation sets out the
details on the
application of the IDI,
such as the percentage
and computation of
qualifying IP income
subject to
concessionary rate of
tax, change in
composition of elected
family of qualifying
intellectual property
rights (IPRs),
application of deemed
income and record-
keeping requirements.
2. IP Nexus ratio: Nexus ratio Nexus ratio
Development (𝐷 + 𝑆1) × 1.3 The modified nexus The percentage of
conditions 𝐷 + 𝑆1 + 𝑆2 + 𝐴 ratio is calculated as qualifying IP income
D = qualifying the ratio of Swiss R&D from an elected
expenditure on expenses and R&D qualifying IPR is
relevant R&D expenses contracted to determined by the
undertaken in-house, third parties multiplied nexus ratio (C x
including expenditure: by 130% (30% uplift), 130%)/C+D where:
• Incurred on divided by the overall C = Qualifying
staffing costs global R&D expenses, expenditure:
• Incurred on including the costs of Includes R&D
software or acquiring the IP. The carried out
consumable items qualifying income directly by the
• Incurred on (direct patent income IDI company,
externally or embedded patent qualifying
provided workers income, i.e., income outsourced
• Incurred on attributable to a patent, R&D, and
relevant payment by-product, or product payments
to the subjects of family determined under cost-
clinical trials based on the residual sharing
S1 = qualifying approach), multiplied agreements
expenditure on by the modified nexus (CSAs); and
relevant R&D sub- ratio, results in the D=
contracted to income qualifying for Nonqualifying
unconnected persons tax relief of up to 90%. expenditure:
S2 = qualifying Includes
expenditure on Documentation duties acquisition
relevant R&D sub- Swiss legislation costs,
contracted to instructs the Swiss licensing,
connected persons Federal Council to amalgamation,
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
Singapore -
United Kingdom Switzerland Patent Intellectual Property
Topic
Patent Box Box Development
Incentive (IDI)
A = qualifying issue further provisions buy-in
expenditure on the for documentation payments for
acquisition of relevant duties. CSAs, and
qualifying IP rights, nonqualifying
including exclusive outsourced
license R&D, etc.
The nexus ratio
Full details are in focusses on establishing
sections 357BLA, a nexus between
357BLB, 357BLC, cumulative expenditure,
357BLD and 357BLE the family of IPRs, and
of the Corporate Tax the associated income
Act 2010. by apportioning overall
qualifying income from
the family of qualifying
IPRs according to the
above ratio of
expenditure.
Note: In the absence of
records, transitional
modifications to the
calculation of the
modified nexus ratio
are available (see
source)
3. Qualifying The following are The profits attributable Qualifying IP income
income included in qualifying to the patent box can refers to royalties or
IP income: include royalties, other income receivable
• Sales income capital gains from the by the approved IDI
(sale of sale of the patent. company as
embedded Qualifying income is consideration for the
goods) direct patent income, commercial exploitation
• License fees or embedded patent of an elected qualifying
• Proceeds of income (i.e., income IPR.
sale (sale of attributable to a patent,
IP) by-product, or product Manufacturing
• Damages for family determined Singapore provide
infringement based on the residual equivalent
• Other approach), subject to manufacturing tax relief
compensation the modified nexus through the Pioneer
(from ratio (see source). Certificate Incentive
infringement) Where the IP is (PC) and Development
Subject to the contained in a product, and Expansion
following exclusions: the box profit is Incentive (DEI) (see
• Income calculated by using the source).
arising from residual method, i.e. by
63
Regulation Impact Statement
Singapore -
United Kingdom Switzerland Patent Intellectual Property
Topic
Patent Box Box Development
Incentive (IDI)
oil extraction deducting income for An approved company*
activities or routine functions under the PC or DEI is
oil rights (equal 6% of the eligible for a corporate
• Income product costs) and tax exemption or a
attributable to brand fee (ad hoc) concessionary tax rate
non-exclusive from the net profit of of 5 per cent or 10 per
licences the product (see cent, respectively, on
source). income derived from
Full details are in qualifying activities
sections 357BH and Manufacturing (see source). IP income
357BHB of the The Swiss patent box was in the PC and the
Corporate Tax Act essentially applies to DEI pre-BEPS (see
2010. manufacturing activity source).
minus a 6 per cent
Marketing returns are return. This would Note: The DEI and PC
excluded using mean any are administered by the
standard transfer manufacturing with Economic Development
pricing rules. Small returns above 6 per Board (EDB) and
businesses can instead cent would benefit awarded to companies
use safe harbour from the regime. making significant
mechanisms to economic contributions
calculate marketing to Singapore.
returns, namely 25% of
the overall return.
Other returns (inc.
manufacturing) are
calculated using a
normal return on 10
per cent on specific
expenses.
Full details are in
sections 357BJ and
357BK of the
Corporate Tax Act
2010.
4. Qualifying If an IP stream The net profit from Full details are
Profits and generates a loss in patents and similar available in Singapore
Losses accounting periods rights contained in legislation and
from the point an IP products is calculated Regulations (known as
asset is granted or an by subtracting 6% of subsidiary legislation).
entity elects into the the costs allocated to The subsidiary
patent box regime, this these products from legislation sets out the
must be carried the net profit from details on the
forward as a set-off these products as well application of the IDI,
amount. Eligible such as the percentage
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
Singapore -
United Kingdom Switzerland Patent Intellectual Property
Topic
Patent Box Box Development
Incentive (IDI)
income can only as the remuneration for and computation of
receive concessional trademarks. qualifying IP income
treatment if the set-off subject to
amount has been Entry into the patent concessionary rate of
reduced to zero. box is linked to a "buy- tax, change in
in" mechanism in composition of elected
A company may also which the qualifying family of qualifying
elect, for each IP R&D costs over the intellectual property
steam, for all IP profits last 10 years, which rights (IPRs),
and losses in that IP were deducted from application of deemed
stream, for the period the taxable base, need income and record-
in between the IP to be taken into keeping requirements.
protection is applied account. In Zug and
for and granted, to be Zurich, these entry
included in the patent costs may be offset
box calculation for the against patent box
first accounting period profits in the first five
after the IP protection years. In Basel, the
is granted. entry costs are taxed at
a very low rate (0.5%)
Full details are in in the first year (see
sections 357CQ and source).
357EC of the
Corporate Tax Act
2010.
5. Tax Relief There is no limit on the Tax relief of up to 90 Preferential tax rate 5
(extent and extent of relief a per cent of patent per cent or 10 per cent
form) taxpayer may receive income, subject to an granted for eligible
from the patent box. overall maximum income (depending size
deduction of 70% of of investment promised
The concession takes taxable profit (when and incremental jobs
the form of a tax factoring the R&D created)). Achieved via
deduction calculated to super deduction of tax reduction formula
provide the taxpayer 150% of the eligible (see Singapore
an effective 10% rate R&D base). legislation). The
on relevant IP profits concessionary tax rate
in an accounting will also increase by
period. 0.5% at regular
intervals as prescribed
Full details are in in the Income Tax Act.
section 357A of the
Corporate Tax Act The incentive period is
2010. limited to an initial
period not exceeding
ten years, and may be
further extended for a
period or periods not
65
Regulation Impact Statement
Singapore -
United Kingdom Switzerland Patent Intellectual Property
Topic
Patent Box Box Development
Incentive (IDI)
exceeding ten years
each (source).
6. Qualifying All companies are Corporation or A company approved
(Eligible) eligible. Full details cooperative. See must be approved by
Taxpayer are in section 357B of English version of minister or delegate to
the Corporate Tax Act legislation provided by receive the lower rate.
2010. the OECD. Non-eligible income
must be in a separate
UK previously allowed company account.
patents to be held by
'holding companies',
but this was not
allowed under the
revised UK patent box.
This may indicate that
OECD rules don't
allow for entities
beyond companies.
7. Industry The oil industry is Applies to whole of Applies to whole of
definitions excluded, with economy. economy.
definitions tied to
activity rather than the
IP asset.
Full definitions can be
found in sections 272
and 273 of the
Corporate Tax Act
2010.
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
Attachment B: Patent box rate and design
• Rate and Discount: The average rate is around 9 - 10 per cent and the
average discount from the headline rate is around 13 - 15 per cent.
• Base: All countries apply their IP regimes to patents. Many apply it to
software. Some apply it to plant variety rights, industrial designs and
models and circuit topography. A few countries apply it to medicine
rights, such as market authorisations by regulators (e.g. Therapeutic
Goods Administration equivalents). Some apply it to IP in small and
medium businesses that are patentable (but not necessarily patented).
- A few countries apply additional restrictions based on R&D
expenditure, employment or tying it to other declarations such
as R&D tax incentives.
• Definition of income: All countries use net income. This typically
includes royalties, licence fees, embedded royalty income in the sale of
goods and services, income from the sale of IP and damages. However,
some countries exclude capital gains and others countries exclude
embedded income.
• All countries in the table exclude acquisitions of IP from the patent box
consistent with OECD guidelines. However improvements after
acquisition will be included provided taxpayer undertakes the R&D.
• All countries in the table apply the modified nexus approach, adjusting
profits from IP by the proportion of R&D that occurred in the country
(or contracted to unrelated parties). Most countries allow local
expenditures in this ratio to be uplift by a 30 per cent factor - up to the
total spent on the IP.
PB rate Corporate Discount Definition of
Country Types of IP
(%) rate (%) (%) income
Belgium 4.44 29 24.56 • Patents • Royalties
• Software • Licence
• Plant fees
variety • Embedded
rights income
• Orphan • Capital
Drugs gains
• Data and • Damage
marketing
exclusivity
67
Regulation Impact Statement
PB rate Corporate Discount Definition of
Country Types of IP
(%) rate (%) (%) income
Luxembourg 4.99 24.95 19.95 • Patents • Royalties
• Software • Embedded
• Plant income
breeders' • Damages
rights
• Orphan
drugs
Lithuania 5 15 10 • Patents • Royalties
• Software • Licence
payments
• Damages
• Other
income
from use
or transfer
of IP
Poland 5 19 14 • Patents • Royalties
• Software • Embedded
• Industrial income
designs • Gains from
• Circuit sale of IP
topography • Damages
• Plant
Breeders
Rights
• Medicine or
veterinary
rights
Turkey 0 - 11 22 11 - 22 • Patents • Royalties
• Software • Licence
• Patentable fees
innovations • Embedded
by SMEs* income
• Income
from sale
of IP
• Damages
Ireland 6.25 12.5 6.25 • Patents • Royalties
• Software • Embedded
• Plant income
Breeders' • Damages
rights.
• Patentable
innovations
by SMEs*
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
PB rate Corporate Discount Definition of
Country Types of IP
(%) rate (%) (%) income
Netherlands 7 25 (15 for 8 - 18 • Patents • Profit from
SMEs) • Software innovation
• Plant *
Breeders' connected
rights to a R&D
• IP where certificate
R&D
declaration
has been
issued.
• Market
authorisatio
n of a
medical
product.
• Patentable
innovations
by SMEs*
Singapore 5-10 17 7 - 12 • Patents • Royalties
• Software or other
income
receivable
by the
approved
IDI
company
as
considerati
on for the
commercia
l
exploitatio
n of an
elected
qualifying
IPR.
Israel 6 - 12 23 11 - 17 • Patents • Net
• Software royalties
• Medicines • Embedded
registered income
under the • Damages
IPO
• Patentable
innovations
by SMEs*
69
Regulation Impact Statement
PB rate Corporate Discount Definition of
Country Types of IP
(%) rate (%) (%) income
UK 10 19 (25 from 9 (15) • Patents • Royalties
1 April 202 • Plant • Embedded
3) variety income
rights • Damages
• Human and
veterinary
medicine
rights (such
as
marketing
authorisatio
ns)
Spain 10 25 15 • Patents • Income
• Software from
• Designs and licencing
Models or transfer
• Secret of IP
formula or
processes
Switzerland Approx. Approx. n.a. • Patents • Royalties
9 - 12 12 - 21 • Topographi • Embedded
es income
• Plant • Capital
varieties gains
• Document • Damages
protection
as per the
Swiss
Therapeutic
Products
Act
France 10 28 18 • Patents • Royalties
• Software • Licence
• Plant Fees
variety • Capital
certificates gains on
• Processes the sale or
directly transfer
related to between
the patent unrelated
• Patentable parties.
innovations
by SMEs*
Greece 10 24 14 • Patents -
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
PB rate Corporate Discount Definition of
Country Types of IP
(%) rate (%) (%) income
Korea 5- 10 - 25 2.5 - • Patents Income
18.75 12.5 • Patentable from the
innovations sale or
by SMEs* transfers
Portugal 10.5 21 10.5 • Patents • Income
• Software derived
• Industrial from the
designs and use or
models. exploitatio
n of
patents
Slovak Rep 10.5 21 10.5 • Patents • Royalties
• Software • Embedded
income
India 10.3 - 30.91 - Around • Patents • Royalties
11.85 35.54 20 - 25 • Licence
fees
Italy 12 + 24 + 3.9 13.95 • Patents • Royalties
1.95 IRAP • Software • Embedded
IRAP • Designs and income
models • Capital
• Processes, gains
formulas
related to
business,
commercial
and
scientific
knowledge
China 15 25 10 • Patents -
• Software
• Plant
variety
rights
• Circuit
layouts
71
Regulation Impact Statement
Attachment C - IP Australia patent fees (IP
Australia website)
Last updated:
1 January 2022
This page sets out some of the basic fees associated with patent applications. A full list
of fees* is available in Schedule 7 of the Patent Regulations 1991.
Fees are payable at different stages through the patent process and will depend on the
type of application you are making.
It is important to remember that these are the fees our office charges for each action.
You should expect additional costs if you are using legal representation.
Fees are subject to change. GST does not apply to these statutory fees under division
81 of the Goods and Services Act 1999.
Fees may vary depending on how you apply and your chosen payment method, with
online filing channels and payment methods typically being cheaper. Different filing
and payment options are offered to ensure our services remain available to everyone,
regardless of their access to our online services. The distinction between these
options is referred to as 'preferred or other means' and shown in the tables below as
'online services' and 'other means'. More information on preferred or other means can
be found here.
Application fees
The application fees you need to pay will depend on the type of patent you apply for.
If you file an application and do not pay the filing fee within two months your
application will lapse.
The first fee is if an application is filed through online services. The second is if an
application is filed by other means (e.g. post).
Schedule Action Fee (online services) Fee (other means)
7 item
201 Provisional $110 $210
patent
application
203 Standard $370 $570
patent
application
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
Schedule Action Fee (online services) Fee (other means)
7 item
202 Innovation $180 $380
patent
application
(divisional
only)
214A National $370 $570
phase entry
(a standard
patent
application
after going
through the
Patent
Cooperation
Treaty
application
process)
Renewal fees
Annual renewal fees must be paid on all standard and innovation patent applications if
you want them to remain in force. The cost will vary depending on the type of patent
and the number of years that have passed since you filed it. These fees are usually due
on or before the anniversary of the filing date of your application.
It is up to you to pay on time. Patent protection will stop if the renewal fee is not paid.
It is important that you keep your contact details up to date by using our online
services.
Standard patent renewals
Schedule Action Fee (online services) Fee (other
7 item means)
211 4th anniversary $300 $350
211 5th anniversary $315 $365
211 6th anniversary $335 $385
211 7th anniversary $360 $410
211 8th anniversary $390 $440
211 9th anniversary $425 $475
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Regulation Impact Statement
Schedule Action Fee (online services) Fee (other
7 item means)
211 10th anniversary $490 $540
211 11th anniversary $585 $635
211 12th anniversary $710 $760
211 13th anniversary $865 $915
211 14th anniversary $1050 $1100
211 15th anniversary $1280 $1330
211 16th anniversary $1555 $1605
211 17th anniversary $1875 $1925
211 18th anniversary $2240 $2290
211 19th anniversary $2650 $2700
211 20th anniversary (pharmaceutical $4000 $4050
patents only)
211 21st anniversary (pharmaceutical $5000 $5050
patents only)
211 22nd anniversary (pharmaceutical $6000 $6050
patents only)
211 23rd anniversary (pharmaceutical $7000 $7050
patents only)
211 24th anniversary (pharmaceutical $8000 $8050
patents only)
211 Renewal payment late fee $100 for each month,
or part thereof that
the fee is late (up to
six months).
Innovation patent renewals
Schedule Action Fee (online services) Fee (other
7 item means)
212 2nd to 4th $110 $160
anniversaries
212 5th to 7th $220 $270
anniversaries
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
Schedule Action Fee (online services) Fee (other
7 item means)
212 Renewal Payment $100 for each month, or part
Late Fee thereof that the fee is late (up to
six months).
Examination and searches
Fees are payable for examination for both standard and innovation patent applications.
Schedule 7 item Action Fee
Preliminary search and opinion (PSO) $950
205 Standard patent examination request $490
207 Innovation patent examination request $500
(applicant)
208(a) Innovation patent third party examination $250
request (third party payment)
208(b) Innovation patent third party examination $250
request (applicant payment)
210 Re-examination request $800
Innovation patents
Innovation patents do not have to be examined. You can choose to keep your patent as
an unexamined innovation patent and never request examination. If competitors
request examination of your innovation patent, they have to pay half of the
examination fee and you will have to pay the other half. If you do not pay, your patent
will cease.
The Australian Government has begun the process of phasing out the innovation
patent. Applicants can only apply for innovation patents in limited circumstances for
the next 8 years. This includes through divisional applications and the conversion of a
standard patent to an innovation patent. This can only occur if the parent application
was filed before 26 August 2021. You can learn more about the phase out of the
innovation patent here.
Standard patents
Standard patent applications must be examined. You must request examination and pay
the examination fee within five years of your filing date. If you haven't requested
examination yourself, you may be directed to request examination and pay the
examination fee anywhere up to 55 months from your earliest priority date. In this
75
Regulation Impact Statement
case, you will be given two months to request examination. If you fail to request
examination and pay the fee within the required period your application will lapse.
Both innovation and standard patents must be examined before you can enforce your
rights.
Acceptance and excess claims
An acceptance fee is only applicable for a standard patent.
Schedule 7 Action Fee
item
213(a) Standard patent acceptance $250
213(b) If the specification contains The sum of:
more than 20 claims at
acceptance (a) $250; and
(b) $125 for each claim in excess of
20, up to and including the 30th
claim; and
(c) $250 for each claim in excess of
30 (if any)
Voluntary amendments
Amendments to a patent application will incur a fee if they are made at either of these
stages:
• before you request examination
• after the standard patent application has been accepted.
There is no fee for filing a voluntary amendment on a provisional application. It is also
free to amend an innovation or standard patent application after examination has been
requested.
Schedule 7 Action Fee
item
222 Amend standard patent specification before examination $250
or after acceptance
222A Proposed amendment increases the claims in the $250 for
complete specification and exceed 20 claims each
additional
claim
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Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
International fees
Fees for patents overseas will vary depending on the country you apply in.
Filing separate patent applications in each country may be cost effective if you choose
to file in only a few countries.
If you file an application under the Patent Cooperation Treaty (PCT), your application
will have automatic effect in the 151 countries in the treaty. This gives you more time
to decide whether you want to pursue patent protection and in which countries. Most
countries require you to file a patent application within 30 months from your priority
date. You have 31 months if you file in Australia. Please check each country's
requirements to ensure the correct fees are paid on time.
If you choose to pursue patent protection without professional advice you should take
extreme care to understand the fees you will be required to pay and when you are
required to pay them.
If you have filed an Australian provisional application with a view to filing a PCT
application, you can pay for a patentability search to be carried out by us on your
invention before you file your PCT application.
When you file your PCT application you must pay the full international search fee. If
we have already conducted a search for your provisional application, you may request
a partial refund of the international search fee. The amount of the refund will depend
on how much additional searching we need to do on your PCT application.
Fees must be paid for a PCT application within one month of filing the application.
Failure to pay these fees will result in the application being withdrawn.
You will also need to pay various national fees in each country where you choose to
begin the national phase. Failure to pay a fee can have serious consequences for the
protection of your rights.
Schedule 7 Action Fee
item
301 Transmittal fee $200
302 International search fee $2200
236 International-type search request $950
401 International filing fee $1970
If the application contains 30 Pages or less
including the request form
For each page in the application in excess of $22
30 Sheets
403 Electronic filing discounts for:
Using ePCT filed in PDF format $296
77
Regulation Impact Statement
Schedule 7 Action Fee
item
Using ePCT filed in XML format $444
Additional international search fee $2200
Cost of preparing certified copy of Basic $50 per
Document document
Copies of Specifications cited in the $50 per copy
International Search Report
304(a) PCT International preliminary exam (with $590
Australian ISR)
304(b) PCT International preliminary exam (without $820
Australian ISR)
402 International preliminary examination $296
handling fee
Oppositions and hearings
Parties involved in patent oppositions and ownership disputes can give evidence in a
hearing overseen by a delegate of the Commissioner for Patents.
Some of the costs involved in opposition proceedings are detailed below:
Schedule Action Fee
7 item
216 Filing a notice of opposition $600
231 Appearing at a hearing $1000 per day
231A Hearing on the basis of written submissions only $600
Sale of documents
Replacement certificates can be ordered via our online services. Options are:
photocopies, certified copies and duplicates. Depending on which option you select
the cost will vary.
When ordering a document, an expedited post service is available if you require your
document to be sent to you faster than normal postage timeframes. This fee will not
increase IP Australia's processing time for any document request.
Commemorative certificates can be purchased from a third-party provider. The price
ranges from $80 plus GST (Certificate Only with domestic postage) to $240 plus GST
(Certificate with Frame & Mount Board with domestic postage). These can be used for
display only and do not replace your certificate for legal purposes.
78
Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022
Number Fee
Copy of one to three documents from the same file $50 each
Copy of four or more documents from the same file $200
Expedited post of a document request $20 each
79