spacer
home > ebr > spring 2012 > patent box initiative
PUBLICATIONS
European Biopharmaceutical Review

Patent Box Initiative

The new British Patent Box initiative reduces tax paid on patent profi ts and aims to boost the life sciences industry. How far can this help to stimulate dwindling R&D, incentivise intellectual property and allow the UK to compete with its European neighbours? In these times of austerity, many sectors fi nd themselves on the brink of fi nancial meltdown. But with increasing demand for drugs and medical devices and the potential for blockbuster returns, the ‘recession proof’ life sciences sector provides a rare bright spot in the pervading economic gloom. But the industry is not without its own challenges. The impact of the patent cliff on revenues has left the life sciences sector exposed - a trend set to continue this year with the patent expirations of Plavix and Seroquel. To survive, companies must abandon the broken blockbuster business model and look to diversify their pipelines or develop replacement products. But the necessary R&D is expensive, and brings no guarantee of a return. Even at its most vital, the need to innovate is too easily overshadowed by the rush to cut costs. In the UK, the life sciences industry is the third largest contributor to economic growth, behind finance and insurance, with an annual turnover of £50 billion. With concerns for the economy still top of the political agenda, the UK Government is looking to tackle the problem of ineffective R&D activity, invest in growth for the industry in the UK and attract inward investment.

In his Autumn Statement last year, Chancellor George Osborne announced a number of measures to support the industry including a £180 million catalyst fund to support biomedical start-ups, a consultation on opening up the NHS to life sciences companies and a shake-up of the R&D tax credits system. Now, the Government is fi nalising the details of its latest incentive, Patent Box, a preferential tax regime that the Government hopes will re-establish the UK’s position as a world leader in patented innovation.

When it comes into force in April 2013, Patent Box will reduce UK corporation tax on patent profi ts to 10 per cent, giving a welcome boost to R&D and providing incentives for companies to retain intellectual property in the UK. Patent Box aims to encourage innovation across high-growth industries which rely heavily on cutting-edge R&D, such as medical technology, with the added benefi ts of intellectual property ownership in the UK helping to protect these investments.

This will make the UK competitive with other European countries, like Ireland, Switzerland and Luxembourg, which have had similar systems in place for years, giving them an edge over the UK. While the existing system of R&D tax credits has given some relief for spending on R&D, until Patent Box there has been no similar incentive for businesses to retain intellectual property (IP) in the UK once it has been created. Even now, if the UK cannot measure up to competing regimes and offer patent-rich life sciences businesses a competitive tax rate, there is a risk that industry will emigrate overseas – representing a huge loss to the British economy where much early stage R&D is currently invested. So how does the UK Patent Box compare?

A Point of Comparison: Luxembourg

Luxembourg has had a Patent Box in place since 2008, which exempts 80 per cent of royalties, damages and capital gains realised on certain IP rights, creating an effective tax rate of around five per cent. Since its introduction, the system has enhanced the development, holding and management of value-added IP activities by Luxembourg businesses and has been well accepted by small, medium and larger multinational companies.

The Luxembourg Patent Box has a number of advantages over the UK’s offering. Whereas in Luxembourg tax relief also applies to trademarks, designs, internet domains and software copyrights, these will not be covered in the UK. Unlike patents, the UK Government does not consider these forms of IP to be strongly linked to the high-growth, R&D heavy activities it wishes to encourage. While this might be the case in the short-term, the global pharma industry landscape is undergoing substantial change: eHealth and medical devices are huge areas of growth and development, and require a convergence of new technology with traditional pharma. Medical devices often gain market share based not on attractive design and branding, but on software, user interface and other functionality which are not necessarily protected by patents. Countries like Luxembourg that permit the inclusion of non-patent IP may prove more attractive to life sciences companies planning for the long-term.

Even when it comes to patents themselves, Luxembourg’s regime is far more inclusive. Taxpayers developing and using patents internally (with no licensing activity) may be entitled to a notional tax deduction equal to 80 per cent of what a third party would have paid for the use of such patent. As it stands, the UK Patent Box will only apply to patents granted in the UK and some other European countries, and not to those granted to UK healthcare and pharmaceutical companies in other major R&D centres like the US and Japan.

Does the UK Patent Box Shape Up?

The UK Patent Box draft legislation is certainly a step in the right direction and has already received a warm welcome from the industry. However, while Patent Box is welcomed to drive investment, innovation and growth in the UK life sciences and medical technology sectors, we must ask whether the draft legislation really goes far enough. Even once the regime is in place, the UK’s overall effective tax rate of 10 per cent will still be higher than those of Europe’s Patent Box trailblazers – Belgium and Luxembourg, for instance, offer maximum effective tax rates of 6.8 per cent and 5.9 per cent respectively. What’s more, phased in over time, the full effect of the relief will not be felt until 2017.

There are also anomalies – the Patent Box proposals, which are perhaps somewhat simplistic in concept, are designed as a ‘one size fits all’ model for all sectors and industries, and therefore will not necessarily provide an optimal tax position for many companies.

Once again, this is especially the case for companies dealing with medical devices. Patents are business critical in the medical technology sector and often relate to technology that is the subject of technical standards. Devices and systems typically encompass thousands of patented inventions, developed by dozens of different businesses, and the contribution made by particular patents is often difficult to gauge. However, unlike the wider pharmaceutical sector, where one patented compound will often be the essence of the entire product, the numerous patents for, say, features of a technology device often bring only small incremental gains. Ironically, the number of patents embedded in a product is not directly taken into account when calculating Patent Box tax relief and, in fact, without careful internal legal and tax controls, the implementation of the Patent Box may become an extremely convoluted exercise. By contrast, in Luxembourg tax relief is much easier to compute by applying a deduction from net positive IP income.

The introduction of Patent Box may also have an impact on regulatory issues in the UK. In 2009 the European Commission suggested that strategies for secondary patents – those covering new products or processes that use existing ingredients already under patent – were often aimed at preventing generic companies entering the market, rather than actually protecting a new innovative product. Now these strategies may also be driven by tax incentives: pharmaceutical companies may divert much needed R&D investment towards quick-win secondary patents to boost their Patent Box relief. The competition authorities may consider stepping in to examine any excessive use of weak secondary patents for such tax benefits.

The Countdown to April 2013

As we have seen in Luxembourg, businesses and governments alike can reap huge rewards from an attractive Patent Box system, but the proposal for the UK still lags behind the regimes of our European counterparts. For the UK to remain attractive to the pharma industry, the Government will need to consider where it can push these incentives further and straighten out the anomalies. For multinational companies to work the system effectively, they will need to analyse the pros and cons of competing regimes and consider the Patent Box alongside other R&D incentives, such as the UK R&D tax credits system that is currently undergoing consultation, to agree the best geographical location for patents to be held. To take best advantage of the Patent Box proposal, companies will also need to review not only their tax and transfer pricing arrangements, but also the terms of joint ventures, licensing arrangements, business disposals and acquisitions, and plans for group reorganisations. Savings could be considerable, but in tax terms 1st April 2013 is just around the corner, so planning must begin now in order for arrangements to be in place when the regime comes into operation.

 


Read full article from PDF >>

Rate this article You must be a member of the site to make a vote.  
Average rating:
0
     

There are no comments in regards to this article.

spacer

Nick Beckett is a partner at CMS Cameron McKenna, where he heads the Intellectual Property practice and life sciences industry group. He represents high-profile companies in the life sciences sector, and also coordinates pan-European patent enforcement and other advice for a number of clients. He advised Takeda on its €9.6 billion acquisition of Swiss drug company, Nycomed, in one of the largest multi-jurisdictional pharma M&A transactions of 2011, and advised Eli Lilly in the leading pharmaceutical parallel trade repackaging case before the European Court of Justice. Nick is also on the Research and Innovation Committee of the Association of British Healthcare Industries.

Diogo Duarte de Oliveira leads the tax practice of CMS’ Luxembourg firm. He has particular expertise in international corporate tax structuring, and is heavily involved in cross-border holding, financing, IP licensing and supply chain structures, and group reorganisations. Diogo is regularly invited to lecture on international taxation topics in Luxembourg and abroad.

spacer
Nick Beckett
spacer
spacer
spacer
Diogo Duarte de Oliveira
spacer
spacer
Print this page
Send to a friend
Privacy statement
News and Press Releases

Validation batches of the vaccine against equine strangles Strangvac® is completed

[Noáin, January 27, 2020] 3P Biopharmaceuticals, a leading CDMO specialized in the process development and GMP manufacturing of biologics has, together with the Swedish biotechnology company Intervacc AB and LIOF-Pharma (previously Praxis Pharmaceutical), completed the manufacturing process for the vaccine against equine strangles called Strangvac®. The validation production batches required for the forthcoming registration application to the European Medicines Agency, EMA, are thus finalized.
More info >>

White Papers

Analysis of Biopharmaceuticals to Conform to ICHQ6B

RSSL

Worldwide, the pharmaceuticals market is anticipated to grow from more than USD 782 billion in 2011 to approach a value of just over USD 971 billion by the end of 2016, registering a CAGR of over 24%. In 2010 the average medicines expenditure per person within the UK was £271, and this is expected to increase with the ageing population. A significant and increasing proportion of these sales are protein-based biotherapeutics or biomolecules. Currently, these account for 19% of the total market, and are growing at twice the rate of traditional small molecule pharmaceuticals. It is predicted that close to 50% of the top 100 pharmaceutical products will be biomolecules by 2016. By far the largest segment of the biopharmaceutical market is the monoclonal antibody (MAb) with an estimated share of 25.6%, which corresponds to USD 51.1 billion.
More info >>

 
Industry Events

2020 Avoca Quality and Innovation Summit

3-4 June 2020, Amsterdam, The Netherlands

The 2020 Avoca Quality and Innovation Summit will take place 3-4 June 2020, in Amsterdam, The Netherlands.
More info >>

 

 

©2000-2011 Samedan Ltd.
Add to favourites

Print this page

Send to a friend
Privacy statement