One of the most interesting policy developments in the global innovation race is known as a patent box, which provides preferential tax treatment for corporate income that comes from patented products. The goal is to encourage commercialization of R&D. Most people in the United States have never heard of patent boxes but within just the last four years, seven countries have adopted the idea. The Netherlands has even expanded its patent box into an "innovation box" that allows profits from R&D-based products or services that have not resulted in a patent or trademark to also be eligible for the lower patent box tax rate. Is the U.S. falling even further behind in the race for global innovation because it has not adopted a patent box? Can a patent box be a way for the U.S. to jump start its global competitiveness?

1. October 4, 2011
Patent Boxes: Innovation in Tax
Policy and Tax Policy for
Innovation
Rob Atkinson, President, ITIF

2. 0.0
5.0
10.0
15.0
20.0
25.0
China
S. Korea
Cyprus
Slovenia
Estonia
Czech Rep.
Latvia
Singapore
EU-10
Portugal
Hungary
Lithuania
India
Austria
Chile
Greece
Japan
Slovakia
Finland
Denmark
Australia
Indonesia
Ireland
UK
Brazil
Mexico
Poland
EU-25
Based Competitiveness (1999-2011)
Netherlands
Turkey
Spain
Argentina
Russia
Canada
Malaysia
EU-15
France
Germany
Sweden
Belgium
NAFTA
South Africa
U.S. Ranks 43rd in Rate of Progress on Innovation-
U.S.
2
Italy

3. Tax Policy is a Key in the New Race for Global
Innovation Advantage
 Corporate tax rates for OECD nations have declined
from nearly 50 percent in the mid-1980s to less than 30
percent in 2009, while the combined federal-state rate has
remained at about 39 percent.
 U.S. R&D tax credit was the most generous in the
OECD in 1992, and is now the 17th most generous.
3

4. Source: OECD
0.1
0.2
0.3
0.4
0.05
0.15
0.25
0.35
0.45
0
Spain
Mexico
Portugal
Czech Republic
France
Norway
Canada
Korea
New Zealand
Hungary
Denmark
Turkey
UK
Japan
OECD R&D Tax Credit Score
Australia
Netherlands
United States
Belgium
Austria
Ireland
Poland
The U.S. ranks 17th of 30 for R&D tax generosity

5. Patent Boxes: The Latest Tool
Patent boxes allow corporate income from the sale of
patented products to be taxed at a lower rate than other
income.
 Within the last several years, 8 nations (7 in Europe )
have enacted patent box regimes that incentivize firms to
patent or produce other related innovations.
5

6. Patent Boxes: the Latest Tool
Country Year Enacted
Belgium 2008
China 2008
France 2005
Ireland 1973
Luxembourg 2008
The Netherlands 2007
Spain 2008
Switzerland N/A
6

7. Patent Boxes: The Latest Tool
Country Regular Patent Box Rate Qualifying Income
Corporate Tax
Rate
Belgium 20% 6.8% Patents and supplementary protection
certificates
China 16% 0-12.5% Registered patents and know-how
France 34% 15% Patents and supplementary protection
certificates
Ireland 10% ˂10% Most IP
Luxembourg 17% 5.9% Software, copyrights, patents, trademarks,
designs, or models
The Netherlands 17% 5% Patents or IP from qualifying and
approved R&D
Spain 25% 15% Most IP
Switzerland 21% 0-12% Most IP 7

8. The Economic Theory Behind Patent Boxes
 Market Failures
 Spillovers
 Risk
 Globally Competitive Corporate Tax Code
 Taxation of mobile vs. immobile activities
8

9. Effectiveness of Patent Boxes
 Limited Data Makes Evaluation Difficult
9

10. Effectiveness of Patent Boxes
 Patent boxes do appear to induce more patent income
35%
30%
25%
20%
15% No Patent Box
Patent Box
10%
5%
0%
Source: Rachel Griffith, Helen Miller and Martin O’Connell, 2010
10

11. Effectiveness of Patent Boxes
 But not more tax revenues (at least in the short term)
120%
100%
80%
60%
40% No Patent Box
20% Patent Box
0%
Source: Rachel Griffith, Helen Miller and Martin O’Connell, 2010
11

12. Would Patent Boxes be More Effective if They
Were Redesigned?
 European design limitation: incentive is not tied to performance
of R&D or production domestically.
12

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

14. Issues in the Design of a U.S. Patent Box
 Rate
 Eligible Activity
14

15. Issues in the Design of a U.S. Patent Box
 Rate
 Eligible Activity
 Link to R&D and Production
15

16. Issues in the Design of a U.S. Patent Box
 Rate
 Eligible Activity
 Link to R&D and Production
 Income from Patents Under Review
16

17. Conclusion
 The United States Would Benefit from an Appropriately
Designed Patent Box
17

18. Thank You
Robert Atkinson
ratkinson@itif.org
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