George Will on the U.S. and China Relationship

George Will, a political conservative commentator and Pulitzer Prize winning journalist in the United States, has authored an Op-Ed in the Washington Post titled, “China’s decline may be looming. Here’s how the U.S. can win, if it so chooses.”  The article provides some sage advice concerning federal spending on basic research as well as immigration policy.  I would add that moving forward in the future will require reexamining cooperation with China.  Additionally, the West’s cybersecurity issues need to be resolved and the United States should continue to work on ensuring that our human capital, all members of our society, reach their full potential.  

New US $1 Billion Fund to Finance Development of Antibiotics

The Biotechnology Innovation Organization has issued a press release announcing the creation of essentially a US $1 billion fund to finance the development (particularly late stage) of antibiotics.  The press release states: 

Today more than 20 leading biopharmaceutical companies announced the creation of an estimated $1 billion fund to help support the pipeline for new antibiotic treatments. The AMR Action Fund was launched as the threat of antimicrobial resistance, or AMR, continues to grow and claim more lives. In response to today’s launch of the fund, BIO issued the following statements celebrating the news:

“Antimicrobial resistance is one of the largest and looming public health threats we face today,” said BIO President and CEO Dr. Michelle McMurry-Heath. “Even as the world’s scientists work tirelessly to fight COVID-19, we must not ease up on our battle against antimicrobial resistance. Just as we’ve seen our industry step up during the pandemic, I applaud these biopharmaceutical leaders and partners for committing to the development of new antibiotics. The AMR Action Fund will provide critical support for the development of new medicines, but it is up to policymakers to enact the long-term changes needed to support healthy, sustainable markets for the future development of new and effective antibiotics.”

“For years, we’ve watched antimicrobial-resistance infections rapidly rise around the world, while the market has slowly shrunk for new medicines to fight them,” said Greg Frank, Director of Infectious Disease Policy at BIO & Director of the Working to Fight AMR campaign. “Today’s new AMR Action Fund will have a tremendous impact on the development of new antimicrobials, but we still need government to implement new policies and incentives so companies can successfully develop, test, and launch new antimicrobial products.”

Biopharmaceutical companies and foundations supporting the fund are:

Almirall, Amgen, Bayer, Boehringer Ingelheim, Chugai, Daiichi Sankyo, Eisai, Eli Lilly and Company, GlaxoSmithKline, Johnson & Johnson, LEO Pharma, Lundbeck, Menarini, Merck, MSD, Novartis, Novo Nordisk, Novo Nordisk Foundation, Pfizer, Roche, Shionogi, Takeda, Teva, and UCB

For more details on the AMR Action Fund, visit www.AMRActionFund.com.

 To learn more about more BIO’s work to fight antimicrobial resistance, visit WorkingToFightAMR.org.

Is it Time to Increase Funding to Universities for Research and Development in the United States?

In a document released by the Association of American Universities (AAU), Mary Sue Coleman, president of the organization, discusses Vannevar Bush’s report, “Science, the Endless Frontier” in a short essay titled, "Celebrating the Government-University Partnership's 75th Anniversary."  Notably, in light of the report, she explains how issues with respect to climate change and Covid-19 only highlight why government should continue to invest in university research.  Unfortunately, the Trump Administration continues to push for less funding for research and development at universities in terms of real dollars.  One of the Democratic presidential candidates who consistently appeared to support university research and development was Tom Steyer.  If former Vice President Biden is elected, hopefully he will consider Tom Steyer for a position in Biden's administration.  If President Trump is reelected, I hope he reconsiders his position regarding funding university research and development.  The AAU document provides, in part: 

. . . 

Famously titled “Science, the Endless Frontier,” the influential report had been requested the previous year by then-President Franklin D. Roosevelt, whom Bush served as chief scientific adviser. As World War II increasingly appeared winnable – in no small part due to the scientific research enterprise that Bush’s office led – Roosevelt was looking to the future. He asked the MIT-trained Bush to file a report addressing four questions:

1. “What can be done, consistent with military security, and with the prior approval of the military authorities, to make known to the world as soon as possible the contributions which have been made during our war effort to scientific knowledge?”

2. “With particular reference to the war of science against disease, what can be done now to organize a program for continuing in the future the work which has been done in medicine and related sciences?”

3. “What can the Government do now and in the future to aid research activities by public and private organizations?”

4. “Can an effective program be proposed for discovering and developing scientific talent in American youth so that the continuing future of scientific research in this country may be assured on a level comparable to what has been done during the war?”

Bush took this brief set of questions and delivered an expansive report with recommendations that have informed U.S. science policy ever since. Calling basic scientific research “the pacemaker of technological progress,” Bush recommended a significant and ongoing partnership between the federal government and universities to conduct research to benefit the nation.

Bush’s report noted that government support for basic research could continue to bolster not only the nation’s security, but also its economic prosperity. “New products and new processes do not appear full-grown,” he wrote. “They are founded on new principles and new conceptions, which in turn are painstakingly developed by research in the purest realms of science!”

Bush’s recommendations led to the creation of the National Science Foundation, the National Institutes of Health and other federal agencies. These agencies conducted and funded the research that sent humans to the Moon, gave us the Internet and smartphones, ended polio and a host of other diseases, and made HIV infection manageable -- more akin to diabetes than a death sentence.

I recently participated in a National Academies of Sciences-sponsored symposium exploring the legacy of this important report and forecasting the future of the government-university partnership. As Vannevar Bush realized 75 years ago, wartime is not the only time for the government to invest in the science that makes us safer and more prosperous. Leading scientists, government officials, and academic researchers at the symposium agreed that – as emerging threats like the COVID-19 virus and the climate crisis make clear – the United States should double down on investments in the government-university research partnership. In fact, in a 2018 article I wrote for Change: The Magazine of Higher Learning, I describe in detail how we must continue pressing toward that “Endless Frontier.” Our prosperous and healthy future absolutely depends on vigorously pursuing this journey.

U.S. House Subcommittee Hears Complaints About Purported Anticompetitive Conduct by Platforms

The U.S. House Subcommittee on Antitrust, Commercial and Administrative Law recently held hearings concerning potential anticompetitive conduct by platforms against smaller companies who may offer services or products on those platforms at University of Colorado Law School.  Notably, the congressmen on the committee were all concerned about the activities of the platforms.  Here are a few of the notable points: 1) the relatively small companies do not spend a lot of money on lobbying; 2) some of the companies are very concerned about having to purchase their trademarks as keywords from Google; 3) there is concern about bargaining or the lack of it with Amazon; 4) there are concerns about the size of Apple’s cut of App Store sales as well as Apple using control over iOS to disfavor competitors of its own products; 5) there is potentially predatory pricing being conducted by some platforms; 6) there is fear that the platforms are using data about a smaller companies’ products or services created when they use the platform against them to compete; 7) none of the smaller companies could very clearly answer the question of whether the complained about conduct violated current antitrust law; and 8) the congressmen repeatedly thanked the smaller companies for their courage for speaking out against the platforms.  There was some discussion concerning intellectual property.  Sonos, the speaker company, noted that a platform was involved in “efficient infringement” against them.  The smaller companies also complained about the cost of litigating against the platforms and how it diverts funding from research and development.  At least one company noted that having the government pursue these cases would help them because of the cost.  As previously mentioned, there was also concern expressed about trademarks, and additionally, how platforms use similar trade dress to competitor's trade dress on products that platforms use to compete against smaller competitors.  Counterfeiting was also a concern. The full hearings can be found, here. 

Can the Donald Keep Up with the EU: EU Tax Reform and Venture Capital Fund

After the hangover of the U.S. presidential election subsides, some serious issues will be addressed, including our current tax and innovation system.  Will the U.S. adopt a patent box?  Will the U.S. lower the corporate tax rate?  What will the Donald do?  I am hopeful that he will push more resources to research and development (which has been in decline in real dollars), and education. Perhaps a gaze across the pond will not only give him some inspiration, but may also solve some of our problems.  

On October 26, the EU Commission announced a new way to tax corporations operating in the EU.  The EU Commission website states:

EU Commission have announced the Common Consolidated Corporate Tax Base (CCCTB), a new EU-wide tax system to improve the Single Market, combat tax avoidance and support growth and investment in the EU. The CCCTB will also support Research and Development (R&D) through tax incentives for companies that invest in real research activities. 

In particular, the proposal includes super-deductions for R&D costs: big companies may deduct 100% of their costs, in addition to 50% deduction for R&D expenses up to €20 million and further 25% deduction for R&D costs that will exceed this amount.
The draft also grants super-deductions for small starting companies without associated enterprises (i.e. start-ups) which may deduct up to 200% of their R&D expenses.

For more information, including videos, please see the CCTB website here.  The EU Commission also recently announced the “European Investments Fund (EIF) . . . , a Venture Capital fund of funds programme of €400 million to boost start-ups' growth and increase investments opportunities of institutional private investors.”  

Stacking the Deck in Analysis of Smartphone Patent Licensing Costs

Estimates of patent licensing costs for smartphone manufacturers are greatly exaggerated. Allegations of excessive fees paid and resulting harm to manufacturer profits, incentives to invest and compete are faulty and unsupported by the facts -- which show much to the contrary.

A "working paper" entitled The Smartphone Royalty Stack: Surveying Royalty Demands for the Components Within Modern Smartphones has been published by one in-house lawyer at Intel and two outside counsel from WilmerHale. Intel Vice President and Associate General Counsel Ann Armstrong and WilmerHale's Joseph Mueller and Timothy Syrett argue that aggregate patent licensing fees including SEPs and non-SEPs are excessive at around $120 per $400 smartphone. They conclude that “few suppliers are meeting the basic goal of selling devices for more than the costs incurred in supplying them,” imply that this is due to the alleged royalty stack, and state that “those costs may be undermining industry profitability—and, in turn, diminishing incentives to invest and compete.”

The paper’s economic and empirical analyses are deficient and defective. In contradiction to its findings, evidence shows that licensing fees:

• Are not undermining profits and are not preventing manufacturers from covering more than their costs. According to Credit Suisse, handset manufacturer operating profits since 2007 have tripled to $51 billion on $326 billion revenues in 2013.
  
• Are not excessive. There is no basis for arbitrary price caps on smartphone patent fees, or limits based on chip manufacturing costs. The latter are unrelated to patented technologies and the value they generate more broadly in the entire device, its use in mobile networks, or across the broader ecosystem including services and applications. Methods of determining charges follow well established principles and benchmarks in bilateral negotiation. Patent licensing fees are analogous to licensing fees for book, music, movie or software publishers, which typically exceed greatly the cost of the physical mediums on which they are published and distributed.
  
• Are nowhere near $120 in aggregate; and there is copious evidence actual payments are much lower than purported. The Paper inexplicably and erroneously disregards fundamental offsets in cross-licensing which greatly reduce or eliminate fees paid to many patent owners. This figure is also systematically biased and inflated by including rates demanded by licensors, even where there is no evidence anybody—including those who have little or nothing to cross license —actually pays such rates. And, where there is, instead, copious evidence that rates actually paid, if at all, are substantially less—orders of magnitude less in some instances. For example, court-adjudicated rates were much lower than “demanded” rates in various cases, and yet the higher figures were used in calculating the above total.
  
• Are helpful, not detrimental, to the highly competitive and flourishing smartphone ecosystem. By every measure the patent system and the risk-reward balance it strikes—spurring innovation, market entry and competition while not overburdening licensees—is unmistakably working very well. 

My full and detailed analysis, in a pdf document, of this working paper by Intel and Wilmer Hale includes copious evidence countering the latter's findings.

This follows a previous my previous IP Finance posting on alleged royalty stacking entitled Theories of Harm with SEP Licensing do not stack up in which I responded to papers co-authored by Mark A. Lemley and Carl Shapiro in 2006 and 2013, and my posting entitled Absurd (F)RAND licensing-rate determinations for SEPs that analyses some U.S. court judgments which have relied on these economists in their royalty rate determinations. 

 

President Obama’s Legacy: An “Innovation Deficit” or Greater Wealth (and wider distribution)?

When we look back at Obama’s presidency, my guess is that he will be known for several things.  He’ll be remembered for health care reform and as the President of “The Great Recession,” and maybe even the end of Osama Bin Laden (hopefully, also immigration reform).  I doubt that everyone will remember that he inherited the financial mess that was “The Great Recession.”  I also doubt he’ll be remembered for creating manufacturing hubs, the American Invents Act (except amongst patent lawyers), fighting “patent trolls,” and starting an initiative to research the human brain.  But, he could be remembered for creating the “Innovation Deficit.”  What is the “Innovation Deficit?”  Basically, it is low federal spending on education and specifically on research and development (R&D)  in light of increased spending on R&D by global competitors.

The U.S. budget for FY 2015 is being prepared and universities are worried (as we all should be).  Last week, 165 university presidents in the United States sent an open letter to President Obama and Congress urging continued strong funding for education, here.  The letter is part of an effort led by the Association of American Universities and the Association of Public and Land-Grant Universities, see www.innovationdeficit.org.  The website includes a fact sheet outlining the “Innovation Deficit.”  It states:

·         Over the last ten years, U.S. R&D expenditures as a share of economic output have remained nearly constant in the U.S., but have increased by nearly 50% in South Korea and nearly 90% in China. (Source: NSF S&E Indicators 2012, Figure O-3)

·         From 1996 to 2007, R&D expenditures in the U.S. grew by an average of 5.8% annually.  During the same time period, China’s average annual growth was 21.9%.  During the first year of the economic slowdown (2008-09), U.S. expenditures decreased slightly while China’s increased by 27%.  (Source: NSF Indicators Figure O-4 and Overview)

·         Between 2000 and 2008, the number of engineering doctorates awarded in China more than tripled to 15,000.  This compared to a total of 8,100 in the United States, of which only about 3,200 went to U.S. citizens and permanent residents.  (Source: NSF Indicators Figure O-10)

·         According to the OECD, government R&D spending between 2000 and 2009 increased by 250% in Korea and 330% in China; U.S. government R&D spending increased by about 45% during the same period.

·         From 1987 to 2008, federal R&D investment grew at just 0.3 percent per year in inflation-adjusted dollars—much lower than its 4.9-percent average annual growth rate from 1953 to 1987—and ten times lower than the rate of GDP growth over that period.  (Source: http://www2.itif.org/2012-leadership-in-decline.pdf)

·         The United States spent up to 17 percent of discretionary spending on R&D during the 1960’s, in part due to the space program, which resulted in a great deal of spinoff innovation; in recent years, outlays have fallen to around 9 percent of the federal discretionary budget. (Source: http://innovationtaskforce.org/docs/Benchmarks%20-%202012.pdf)

·         In 2008, China awarded 1 million first university degrees in natural sciences and engineering, up from 280,000 in 2000. That same year, the total number of first university degrees in natural sciences and engineering awarded in South Korea, Taiwan, and Japan (330,000) exceeded the 248,000 earned by U.S. students, despite the considerably larger U.S. population. (Source: NSF Indicators p. O-7)

·         The proportion of U.S. Patent and Trademark Office patent grants given to U.S. entities declined from 55% in 1995 to less than half in 2010. (Source: NSF S&E Indicators 2012, Appendix Table 6-45)

·         The percentage of U.S. gross domestic expenditures on R&D funded by the government declined from  47.1% in 1981 to 33.4% in 2011. The U.S. trails nine OECD nations in this percentage. (Source: OECD)

These statistics paint a disturbing picture—especially if this trend continues.  And, if you examine the preview document prepared by the Association of University TechnologyManagers (AUTM) titled, “American Universities: Unsung Heroes of the Economic Recovery” (August 5, 2013) that may provide a clue to the solution to a slow growing economy, you may become even more concerned.  The AUTM document provides a glimpse at the upcoming Annual Licensing Survey that will be released in full in December of 2013.  The preview document states that:

Institutions responding to the survey reported $36.8 billion in net product sales from licensed technologies in fiscal year 2012. In addition, startup companies formed by 70 institutions employed 15,741 full-time employees. This was the second year in which AUTM asked questions specifically targeted at ascertaining the economic impact of academic technology transfer. 

"When people think about job creation, they don't typically think about universities, but the data show that universities substantially contribute to the creation of new jobs in this country," adds Flanigan.  

Highlights of the AUTM U.S. Licensing Activity Survey:  FY2012 include: 

22,150 total U.S. patent applications filed (+11.3%)[;] 14,224 new patent applications filed (+7.2%)[;] 5,145 issued U.S. patents (+9.5%)[;] 5,130 licenses executed (+4.7%)[;] 1,242 options executed (+7%)[;] 483 executed licenses containing equity (+16.1%)[;] Total license income: $2.6 billion (+6.8%)[;] 705 startup companies formed (+5.1%)[; and] 4,002 startups still operating as of the end of FY2012 (+1.9%).

Back in 2001 when President George W. Bush first took office, I remember reading an article about how his administration planned to cut federal spending on R&D.  I remember thinking someone needs to get educated about what is happening with federal R&D funding because they are going to make a big mistake (for many reasons).  Within a few weeks, the Bush Administration announced that they were not going to cut spending in that area.  I hope we find the Obama Administration pushing hard for more spending on R&D.  We need to "feed that Pig." 

Let’s assume that we do the right thing and "feed the Pig." Could the Obama Administration do more than just provide federal funding for R&D?  One idea that has been floated has been the creation of a federal system of universities, “India’s Bold Solution to the US College Crisis: Federal Universities.”  This is an intriguing idea that may inject some needed “umpf” into the U.S. university system for R&D.  Perhaps the federal universities could be built around specific technologies—places where innovation could quickly take place in a system that quite rationally does not change quickly.  As I blogged about before, perhaps something like the Cornell project in NYC, but without a lot of baggage.  Greater wealth—and maybe some help for wider distribution of it.  Something to think about.   

The Patent Box Coming to the United States Soon?

Congresswoman Allyson Schwartz recently introduced a bill in the House of Representatives to establish a patent box similar to that adopted by some European countries (she previously introduced the bill in 2012 and here is the press release for that bill).  The bill provides a lower tax rate on profits from the exploitation of patented technology developed in the United States.  The patent box is designed to lure entities to the home of the box and thus, create jobs.  The effective tax rate for qualifying profits appears to be 10%.  Here is a link to the proposed legislation and links to several news articles about the 2012 and 2013 proposed legislation here, here and here.  In a helpful 2012 article by Pricewaterhouse Coopers, Is it Time for the United States to Consider the Patent Box, the authors state:

According to the most recent OECD data, as of 2009 the United States ranked 24 out of 38 countries (including 32 OECD members plus Brazil, China, India, Russia, Singapore, and South Africa) in the value of tax incentives provided per dollar of R&D. Because the U.S. research credit expired December 31, 2011, the U.S. incentive provided for R&D is now even lower than indicated by the OECD ranking.

Moreover, according to 2011 OECD data, the combined federal and average state statutory corporate tax rate in the United States (39.2 percent) is second highest among OECD countries, and more than 14 percentage points greater than the average for the other countries (25.1 percent). Therefore, royalty and license income earned from U.S.-held IP is taxed at a 50 percent higher rate than IP held in the average OECD country. The disparity in taxation of IP is even greater when compared with countries with patent box regimes, where qualified IP typically is taxed at rates between 5 and 15 percent.

The time appears to be closer.  What do you think?  The article also has a useful chart comparing patent box legislation in Belgium, France, Luxemburg, Netherlands, Spain and the U.K. 

Autumn Statement & IP

Not a lot in last week's Autumn Statement for IP, but I thought I'd cover what was there:

• removal of income tax relief for individuals paying non-trade patent royalties (s448 ITA 2007). This has been taken out because the Treasury felt it was being misused for tax avoidance – it only applied to individuals who paid patent royalties otherwise than in the course of a trade, so it wasn't often claimed in any case.  It affects any individual holding patent licences as an investment – it won't affect anyone owning patents outright, as they would not generally be paying royalties where they own the patent outright.
• £600m towards Research Council infrastructure and facilities for applied R&D – this seems to be new money, although it's not quite clear from the documents released so far.
• And finally, the proposed reduction in corporation tax to 21% in 2014 will benefit any profitable IP companies, although it's not specifically aimed at the sector.

The draft Finance Bill (due to be published tomorrow) should also have details of the proposed 'above the line' (ATL) R&D credit which will replace the current large company R&D tax relief – the key feature of the ATL credit is that it will be repayable to loss-making large companies (at least, in theory – the draft Bill should reveal whether companies are actually likely to get repayments in practice).

European business still investing happily in R&D -- but not in pharma

According to the European Commission's Joint Research Centre (JRC, "the European Commission's in-House Science Service"), leading EU businesses expect their investments in research and development to rise by an average of 4% annually during the period 2012 to 2014. This information comes from the 2012 EU Survey on R&D Investment Business Trends, which was published here today (thanks, Chris Torrero, for the link).

The results of this survey, which was carried out by the JRC's Institute for Prospective Technological Studies(IPTS) together with the European Commission's Directorate-General for Research and Innovation, are based on information from 187 of the 1,000 EU-based companies that were studied when the 2011 EU Industrial R&D Investment Scoreboard was prepared. According to the report:

"It is in the software and computer services sector that the expectations of growth in R&D investments over 2012-2014 are the highest, with an average of 11% per year. Like for most sectors, this is higher than the annual R&D investment growth rates observed on average over the 2007-2010 period. However, in the pharmaceuticals and biotechnology sector, the expectations for 2012-2014, at 3% per annum, are lower than the average rate observed over 2007-2010".

This blogger is hardly surprised at the unpopularity of pharma R&D investment. If he had any cash to invest, he'd plough it into the generic pharma sector, where risks are low, profitability high and it may be seriously questioned whether patents continue to offer any genuine incentive to invest. In contrast, Linux and open-source hardly qualify as a generic threat to software patents and copyright, though, which is presumably why investment is heading into the software sector and computer services sector.

Farewell Sandwich

In the midst of discussions about the future of IP tax and incentives in the UK comes the news that Pfizer is closing its UK R&D facility at Sandwich in Kent, after about 50 years of R&D at the site. The pharma group will no longer have any UK R&D operations.

It's part of a restructuring that will move more of Pfizer's R&D to the US, and reduce the amount of R&D that the group does, moving away from 'high-risk R&D' and eliminating altogether a number of areas of R&D. That said, a move to the US does suggest that they aren't being enticed by tax incentives, as the US incentives for R&D are not the most attractive. The project seems to reflect its description as a cost-control exercise overall, unsurprising given the group's cuts in sales forecasts, reflecting issues such as Lipitor coming out of patent protection in November.

More R&D tax relief claims needed!

HMRC has published the latest set of details on the number and value of R&D tax relief and R&D tax credit claims, covering claims in 2008-9. There is an increase in the number and value of claims, but it is surprisingly small considering that 2008-9 was the catch-up deadline to get in claims for relief on expenditure over the previous six years (the relief now has to be claimed in the company tax return or amended return, so companies have a much shorter time limit to claim).

The total number of companies claiming the relief was 8,350 in 2008-9, an increase of just 10% in a catch-up year that was well-publicised - that seems a very low number, and it may make the tax relief vulnerable to change/removal in the upcoming consultation on how IP is taxed in the UK.

VAT and R&D services: Kronospan

Kronospan Mielec sp zoo v Dyrektor Izby Skarbowej w Rzeszowie (Case C-222/09): the ECJ has confirmed that where R&D services carried out by engineers are supplied ‘on a contract basis for the benefit of a recipient established in another Member State’, they were ‘services of engineers’ and so the place of supply is the country in which their work is carried out, not the country in which the supplier is based. Given that VAT varies between 15% and 25% across the EU, describing the service correctly can make quite a difference in cross-border services.

In this case, Kronospan, a Polish company provided R&D services to a Cypriot company. The services were described as ‘research and development work relating to the environment and technology, carried out by engineers’.

Poland claimed that some of the services were ‘scientific activities’ - this would mean that the place of supply for VAT purposes was Poland and so Polish VAT (22%) should have been charged by Kronospan. The company disputed this and argued that the services were services of engineers, so that the place of supply was in Cyprus where the work was carried out, so that Cypriot VAT was due - at 15%.

The general rule on the place of supply of services for VAT purposes changed from 1 January 2010, so that the general rule is that services are supplied where the customer is based – but this remains subject to overriding provisions in certain areas, including cultural and scientific activities, and use and enjoyment provisions. It’s important to review exactly what is being done and to make sure that the contract is accurately depicting the services.

IP & the Chancellor

The UK Pre-Budget Report today had a couple of IP moments - overall potentially useful, but really just not trying hard enough.

10% tax on patent royalties

Good news? Well, yes: but only if you're planning on receiving income from 'innovative industries' (broadly, it's only going to be available for pharmaceutical and biotech patents). This is very much less generous than the similar royalty taxes in the Netherlands, Luxembourg and Belgium - all of which equate to a tax rate of around 6% and are available for a much wider range of IP.

So, good news for smaller business doing research that will lead to pharma/biotech patents - although 10% is higher than the Benelux options, the costs of successfully operating a non-UK company and keeping its profits out of the claws of the UK Revenue could be more than the 4% difference in rates for a small business.

The sting in the tail (because there had to be one): this doesn't come into effect until April 2013, and will only apply to patents granted after that date [Edited to add following comment - the date from which patents will be included isn't clear: April 2013 is the backstop date, it might be earlier. Lobby to make sure it is!]. There is advance publicity, and then there are Budget announcements. Trying to be more positive, there is some time to work on the government (any government!) to expand the scope of this proposal.

R&D relief: ownership requirement removed

Of more general use is the change (effective today) in requirements for small and medium-sized company R&D relief: there is no longer any requirement that the company owns the IP resulting from the R&D. Although HMRC could be flexible on this (eg: for university spin-outs with licences) they have also been very unhelpful in some cases.

Tax incentives for Belgian R&D

IP Finance is pleased to host this short article by Tom Swinnen (Thompson Hine LLP, Brussels) on tax incentives for research and development in Belgium:

TAX INCENTIVES FOR R&D IN BELGIUM

Over 170 biotech companies operate in Belgium, generating more than 16% of the European turnover in the sector, making Belgium one of the most important countries for R&D in the European Union. Belgium has taken several measures to promote investments in Belgium and to create a favourable environment for R&D activities. For the 2008 tax year, a new tax incentive for patents has been introduced which leads to a maximum effective tax rate of 6.8% on patent income. The newly adopted Patent Income Deduction (PID) results in the lowest effective European tax rate on income derived from the licensing of patents or the use of patented products, making Belgium a highly favoured location for foreign investment.

The PID allows Belgian companies as well as Belgian branches of foreign companies to deduct from their Belgian taxable basis 80% of the royalties received from patents resulting from R&D activities. This is intended to encourage all R&D activities in relation to the development or improvement of patents. The main characteristics of the PID and other R&D tax incentives are as follows.

PATENT INCOME DEDUCTION

Eligible taxpayers

The PID is available to all corporate taxpayers in Belgium, in essence all Belgian resident companies and Belgian permanent establishments of non-resident companies. No tax ruling is necessary and the PID applies automatically. The compliance formalities are minor and consist of fulfilling a specific form enclosed with the tax return.

Qualifying patents

The PID only covers patents and supplementary protection certificates, but not any other intellectual property rights. The company must hold a patent right; the PID does not apply before the grant of the patent and is no longer available after the patent's expiry. The patent may be (i) self-developed or (ii) acquired and further developed.

 Self-developed: the patent is totally or partially developed in its research centre(s) in Belgium or abroad.

 Acquired and further developed: the company either acquires the patent from or is granted a licence to the patent by a third party, provided the company further develops the patent in the company's research centre(s) in Belgium or abroad. However, it is not required that the further development results in an additional patent.

The research centre that developed or improved the patent must constitute a branch of activity of the company, i.e. a division of an enterprise that constitutes an independent business unit, and can be located in Belgium or abroad.

The PID is not restricted to Belgian patents but extends to patents valid in other jurisdictions (e.g. U.S., Japanese or German patents). Also, the company does not need to be the sole and full owner of the patent rights -- it can hold a patent together with other companies and the patent can be held on the basis of other property rights, such as usufruct rights.

For the PID to apply, it is essential that the patent has not been commercialized anywhere in the world before 1 January 2007.

Qualifying income

The patent can be licensed to one or more third parties or can be used in the manufacturing process by or on behalf of the company.

 If the patent is licensed, the income consists of licence payments such as royalties, milestone payments and upfront fees. When the parties are related, the royalties must comply with the arm's length principle in order to avoid abuse. To the extent that the remuneration also relates to non-patent intellectual property, only the portion that relates to patents qualifies for the PID.

 If the patent is used in the manufacturing process by or on behalf of the company, it is important to determine how much of the turnover income can qualify for the PID. This will typically be calculated as that portion of the derived income that the company would have received for licensing the patent to an unrelated third party in an arm's-length transaction.

In order to avoid abuse and double deductions, remuneration paid to third parties on acquired patents and the deprecation on these patents must be deducted from the basis of the PID if these costs are already deducted from the taxable result in Belgium. This anti-abuse provision is not applicable to self-developed patents. The R&D expenses associated with self-developed patents should not therefore be deducted from the basis for the PID.

The Belgian PID is not capped.

OTHER TAX INCENTIVES

The PID can be claimed in addition to other already existing tax incentives, such as:

Notional interest deduction

Together with the PID, Belgian resident companies as well as permanent establishments of foreign companies paying taxes in Belgium, can benefit from the Notional Interest Deduction. The deduction equals a percentage fixed on a yearly basis (e.g. 4.307% for tax year 2009) of the equity shown in the balance sheet of the annual account.

Investment deduction and R&D tax credit

Investments in patents and fixed assets used in Belgium to promote R&D are eligible for an increased investment deduction of either 13.5% on the acquisition value or 20.5% of annual depreciations permitted for tax purposes

As an alternative to the investment deduction, a R&D tax credit is granted on qualifying R&D-related investments. The taxpayer must opt for one of the two methods (Investment deduction or R&D tax credit).

Partial payroll withholding tax exemptions

Companies active in R&D can benefit an exemption from payroll withholding tax for researchers (PhD, engineers and master degrees). Recently, the maximum exemption has been increased from 50% to 65%.