Thursday, March 01, 2018

"Patent Boxes," our Canadian Space Agency and the Lack of Real Innovation in the 2018 Federal Budget

         By Chuck Black

It's noteworthy that no one, not even the Federal Space Advisory Board (SAB) tasked with making the Federal government aware of space industry concerns, has stepped up to the plate to criticize Tuesday's Federal budget and its lack of new funding for the Canadian Space Agency (CSA).

Russ Roberts. Photo c/o CATAAlliance.

Part of this reticence is because provisions of the 2018 Federal budget are indeed helpful to Canadian academics and researchers, who make up a plurality of the SAB's members and mandate.

As outlined in the February 28th, 2018 Globe and Mail post, "Basic science makes historic gains in research-friendly budget," the 2018 budget allocated $3.8Bln CDN of new funding spread over the next five years to a range of science and academic programs and promised the substantial consolidation of Federal granting programs, down to thirty-five from a pre-budget total of ninety-two.

But those improvements won't help rocket scientists, graduate students and entrepreneurs in Canada when it comes time to commercialize the innovative technologies derived from our space program, or assist Canadian academics in other areas to fund and grow their tech driven start-ups.

For that, a different budget is needed.

According to Russ Roberts, the Sr. vice president of advocacy for the Canadian Advanced Technology Alliance (CATAAlliance), the current funding is almost entirely "pre-competitive, and focused around funding basic research. The key to maximizing commercialization opportunities for new technology is to provide tax based benefits for Canadian start-ups and other companies to not only commercialize Canadian developed intellectual property (IP) but to also encourage the new businesses to stay in Canada."

Roberts spoke with this blog on Wednesday morning, the day after the budget was released.

Former Blackberry co-CEO Jim Balsillie is another Canadian who believes that commercialization is an entirely different activity from basic science and requires different tools and policy. As outlined in the February 3rd, 2017 Profit post, "The Problem With Canadian Innovation, According to Jim Balsillie," Canada has world class ideas. "We invented the Internet search engine. That was OpenText. The University of Toronto invented the touch screen. We have invented lots of great stuff. And that shows in science and technology—we get lots of peer-cited stuff." But Canada hasn't updated its policies on commercialization since the 1980's and many of our best and brightest have moved to other countries, where the funding and tax structure needed to encourage commercialization is already in place and entrepreneurs have the tools needed to scale their ideas and inventions into global leaders. Graphic c/o Profit. 

Instead of the Federal government's approach, Roberts argues for the development of a new tax regime designed to "incentivise" research and development by taxing patent revenues at a lower rate from other commercial revenue, which would encourage re-investment in the technology (to maximize its growth) and keep the corporate head office in Canada (to minimize the taxes).

He calls it a "patent box" strategy although its also often known internationally as an "intellectual property box regime."

The strategy, first used in Ireland in the 1970's has subsequently been incorporated into the tax codes of other nations including France, The Netherlands, Spain and the United Kingdom.

It's also a well known domestic strategy which, as outlined in the March 21st, 2016 Globe and Mail post, "Quebec’s new ‘patent box’ tax break should be an example for Ottawa," has been adapted by at least one provincial government.

But it's also a strategy which has mostly been ignored by the Federal government.

Of course, not everyone likes the idea of a patent box. As outlined in the November 13th, 2014 Tax Justice Network post, "Goodbye UK Patent Box – don’t let the door hit you on your way out," there are those who consider the implementation of separate tax regimes among countries to be a barrier to the "genuine engagement in the evolution of an international system of corporate taxation that actually works," because variations in national tax law make it easier for corporations to move into jurisdictions with lower tax rates. According to Wikipedia, the Tax Justice Network is an "advocacy group consisting of a coalition of researchers and activists with a shared concern about tax avoidance, tax competition, and tax havens." Graphic c/o Tax Justice Network.

According to Roberts, CATAAlliance is having difficulty convincing Ottawa to even acknowledge the difference between funding basic science and encouraging commercialization efforts.

"We are still in discussions, looking for the government to acknowledge the issue," he said. "This budget has a long way to go before it begins to generate real innovation."

Such concerns are unlikely to be addressed soon, especially given that the current North American Free Trade Agreement (NAFTA) between Canada, the United States and Mexico, is in the midst of being renegotiated.

Any talk of creating a Canadian patent box could easily be misinterpreted as creating a "barrier to trade" by setting up a disparate tax regime between the three nations.

So nothing will be done, at least for now. The Federal government will continue to pretend that increased funding for basic science will help the scientists to build the companies needed to cash in on their inventions and build the economy. Ottawa may even allocate additional money to the cause.

After all, the next budget is an election budget.
Editors Note: It looks like the US is also aware of the concept of patent boxes. As outlined in the November 13th, 2017 post on the New York, NY based Davis Polk & Wardwell LLP law firm Tax Reform and Transition blog site, under the title, "Senate Tax Proposal Establishes “GILTI” Patent Box," the US Senate has even entertained the idea of introducing at least some aspects of the patent box concept into US law.
Chuck Black.

Chuck Black is the editor of the Commercial Space blog.

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