A heterogeneous group of patent boxes are available today in the Netherlands, Belgium, Luxembourg, Britain, Ireland, France and Spain. The reasoning is that companies in general have little incentive to commercialize their R & D results and patents, and invest more in research. Thus, governments around the world have for decades offered various direct and indirect R & D support to firms to increase R & D investment. In recent years, several EU countries have introduced numerous varieties of patent boxes - a form of indirect R & D support. As profits from patents and intellectual property are taxed at a lower rate than the regular corporate tax it works as an incentive.
One advantage of patent boxes, writes Roger Svensson, is to provide incentives to commercialize patent (intellectual property). Yet another purpose is to attract businesses to place ownership of patents in the host country, generating revenues for the host country from patent profits.
The cost would be at least 4.4 billion on an annual basis, if the corresponding patent box system used in the UK would be introduced in Sweden. The cost is equivalent to a reduction of the corporate tax rate by 14 percentage points (from 26.3 to 12.3 percent in 2009). Roger Svensson points out , that it's not R & D but patented profits that would be taxed less. In addition Swedish businesses specialize in more patent -intensive sectors compared to the UK. Swedish inventors were granted 1,161 EPO patents compared to 2,160 for the UK in 2009; I.e. Sweden is at 54 per cent of the UK level (OECD 2013).This means that patent boxes would be more expensive in Sweden: 6.3 billion kronor.
The disadvantages of patent boxes are reportedly many:
- It would violate EU Laws if patent boxes control where R & D activities are located.
- Patent boxes only support patent projects that have already succeeded. No support for businesses in start-up or development stage, which is most in need of R & D support.
- There’s is a substantial risk that patent boxes will open up for extensive international tax evasion, as it is a matter of differentiated tax rates for one of the most differentiated tax bases.
- There is no empirical evidence that patents boxes stimulate to more research. Other tax incentives, on the cost side, are connected directly to R & D investment but patent boxes are linked only indirectly to research.
- Patent boxes create a complicated regulatory framework making it difficult to determine income and expenses from patents. Firms have an incentive to report high income and the lowest cost possible by patented products, to take maximum advantage of the patent box's lower tax rate.
- It is expected that companies will apply for more patents for trivial inventions in order to get the lower rate. There is also the risk that companies will include qualified patents in products just to be able to take advantage of the patent box structure.