As a tax professional, I read a lot of books on tax and economic laws. Many such books and legal commentaries have names such as ‘Mr XYZ’s Treatise of Tax Law,’ and so on. Mr XYZ was a stalwart in tax law of his times and may no longer be among us. But his work lives on to carry forward his legacy. Such is the power of copyrighting one’s good work — his estate now receives royalty for every copy of the book sold.
But as the world grew more complex, individual inventors came to be replaced by large corporations that invested billions of dollars on research and development. Inventions that came about as a result of such corporate R&D efforts came to be registered in the names of corporations and they earned royalty. The pharmaceutical industry is one good example of how corporate backed R&D has made the world a better place.
A factory that manufactures a commodity and a patent/ copyright that earns royalty are nothing but assets in the eyes of the corporation that owns them. However, there is one principle difference between the two — a factory is a tangible asset and a patent is an intangible asset. Also, once invented, a patent may not require substantial efforts on continued development (modifications, maybe) to keep it in sync with the rapidly changing world.
Registering patents
These principal differences have, in the recent past, paved the way for some creative tax planning. Being an intangible asset, a patent or copyright can be registered anywhere in the world. This gave scope for diversion of royalty income to countries that have low tax rates by merely registering the patent/ copyright there.
Now, such aggressive planning by corporates led to a loss of valuable tax revenue in many countries though the R&D activity underlying the patent was undertaken in their country, merely because the corporation chose to register the patent elsewhere and create the necessary substance in the low-tax country.
Now, such ingenious planning by the corporates gave rise to an equally clever response from the tax authorities — offer low rates of tax in the home country, so that it becomes indifferent as to where one would want to register the patent. However, the promise of low tax rates comes with riders (ie ‘anti-abuse provisions’), so that only a genuine inventor who is interested in contributing to the growth of the economy would get the benefit.
Innovation Box regime
This, my friends, is called ‘Patent Box Regime’/ ‘IP Regime’/ ‘Innovation Box Regime’ in the Western tax world. Now, in the recently announced Budget 2016, India too has announced a special regime for taxing income from patents at a special rate of 10 per cent. Under the patent regime, royalty income from patents registered in India will be taxed at a concessional rate of 10 per cent. The patent shall be developed and registered in India. However, no expenses would be allowed against the royalty income and the basis of taxation would be on a ‘gross basis’.
Such a regime was much awaited — this will encourage corporations to register in India the patents relating to Indian R&D work undertaken in the country, and will greatly help shore-up foreign exchange reserves when the patents are licensed out globally.
The scheme will also incentivise the setting up of high-value R&D centres in India by multinationals which will help create and foster a culture of innovation and invention in our country, right from schools and colleges. I feel such a regime will go a long way in tapping into the enormous potential our country holds in terms of a skilled and energetic workforce.
Both the writers are senior tax professionals, EY India