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Yves here. We are delighted to welcome two world-recognized tax experts as writers on our site. They also happen to fall in the minority that believes that paying taxes is the price of civilization.
One of the things that has worked in the favor of corporate and individual tax gamesmanship is that tax, and particularly cross border tax, is so complex as to induce MEGO (My Eyes Glaze Over) among just about anyone other than serious professionals. I’ve noticed, for instance, that attorneys in specialities other than tax seem if anything to have more of an antipathy to tax issues than mere mortals.
And that suits everyone on the inside. Complexity assures limited entry into the discipline which in turn means high pay levels for those with expertise. It also helps lobbyists push for regulations that further lard up the tax code, since politicians can tell their constituents they’ve done something for them (“Tax incentives for the locally pottery kiln”). Those provisions also serve corporations and the wealthy generally, since they further the use of tax reduction as an illusory economic stimulus. In fact, the main effect is a race to the bottom on corporate taxes, which results in a shifting of the tax burden to regressive consumption taxes and not-very-progressive personal income taxes. In other words, tax avoidance has long been a means for redistributing income to the capitalist classes.
Heretofore, coverage corporate taxes has seldom gotten outside the business section of the paper. But cases of prominent US companies like GE and Apple paying zero or near zero taxes has galvanized public attention. And in the UK, a mass movement, UK Uncut, has emerged to opposed what amounts to tax scoff-lawing via clever use of loopholes, particularly by multinationals.
In the US, the issue of corporate tax avoidance via inversion deals (buying often inconsequential foreign companies in more favorable tax jurisdictions as the vehicle for moving the corporate tax domicile there) has become so controversial that the Treasury has roused itself to block this move.
This post gives a layperson-accesible description of a UK ruse in the international tax race to the bottom, that of the “patent box”.
By David Quentin, a UK tax lawyer and senior adviser to the Tax Justice Network, and Nicholas Shaxson, the author of Treasure Islands, an award-winning book about tax havens
By way of background, The “Patent Box” is a tax incentive that reduces the effective UK corporation tax rate to 10% (as compared to 21%) on income attributable to patents, subject to certain conditions. Generally-speaking tax incentives like this seek to attract mobile capital to relocate to one’s home jurisdiction (or discourage it from migrating away), and the hope is that jobs and prosperity will follow (or remain, as the case may be). Other jurisdictions may try to follow suit, and the ensuing international jostling is a process that some call international tax ‘competition’. Others call it a race to the bottom. Whatever one calls it, the patent box must be understood in this context. Several European regimes have popped up in this terrain, notably in Ireland, Switzerland and the Benelux countries: Belgium, Netherlands and Luxembourg.
The UK government has been frank about the tax ‘competition’ aspect of it, expressly announcing the regime as an enhancement to the “competitiveness” of the UK tax system. In 2011, when the UK’s Patent Box regime was in development, PWC published a pamphlet entitled Is it time for your country to consider the “patent box”? which is equally frank about the realities of tax competition:
Intellectual property (“IP”) is highly mobile and can be easily separated from the jurisdiction where it was developed and migrated to low-tax jurisdictions. Over the last few decades, a greater proportion of IP (and the resulting revenue stream) has been moved offshore to minimize tax. In response, some countries have adopted the concept of a “patent box,” a tax regime that sharply reduces the rate of corporate tax applied to income resulting from qualifying IP.
Yet it would be a mistake to imagine that this is just about states being forced to reduce tax rates on intellectual property income because of the threat of migration. As PwC explain, the “Patent Box” regime may be a way to help states pander to the wishes of flighty corporate capital with a minimum of democratic fuss:
In general, most businesses would prefer general tax relief in the form of an overall corporate tax rate reduction. However, since in some countries incentives can be viewed politically as more feasible than reducing overall corporate tax rates, an alternative tax reform scenario could be the adoption of a patent box regime. Such a regime likely would encourage companies to locate the high-value jobs and activity associated with the development, manufacture, and exploitation of patents in-country.
Note that section in bold. Intellectual property, PWC suggest, is an opportunity for states to subsidize returns to capital, because it is possible to build a narrative of utility around intellectual property. PwC is not interested in demonstrating that the “Patent Box” in fact has these benefits of utility; the issue is the political feasibility of the tax cut for corporate capital. (It’s also worth noting that tricky tax subsidies are much less visible to democratic populations than headline corporate tax rate cuts are.)
While the social and economic utility narrative is weaker for some forms of intellectual property (trademarks, for example, or copyright), it is stronger in the case of patents, which are associated – at least in the minds of policy-makers and the public – with technology-driven economic growth and advancements in medical science.
The UK has carefully targeted this intersection between mobility and apparent utility. Its Patent Box, in contrast to, say, Luxembourg’s more generous approach, is restricted specifically to patents rather than applying to a broad spectrum of intellectual property assets, and it requires that there be some activity associated with the patent.
No doubt it is this careful targeting which emboldened David Gauke, Financial Secretary to the UK Treasury, to describe the Patent Box as having been introduced to “spur innovation”.
But this is disingenuous, for several reasons:
The targeted sectors are already in the business of developing new technologies: it is hard to imagine there are dormant research projects, from which latent research capacity is currently being withheld, which will be roused into action because of the prospect of the resulting profits being taxed at 10% rather than 21%. In any event, technology-driven sectors are already lavishly subsidised in the UK through enhanced tax deductions and tax credits attributable to expenditure on research and development. The patent box is therefore an further subsidy supplementing the eventual profits, in addition to the subsidies already available for product development.
The Patent Box rules are not structured to reward the creation of new technologies; existing patents can be brought in from outside and the new owner can nonetheless benefit from the relief, provided that some activity is undertaken in relation to the exploitation of the patent.
Perhaps most importantly, it is the very existence of intellectual property rights that spurs innovation, so there is no need for them to have a special extra subsidy. However socially useful a patented technology may or may not be, a patent is a privately-held and transferable monopoly over the commercial exploitation of an idea, and that monopoly only exists because the state chooses to enforce it. Bringing into being and protecting such privately-held monopolies is a way for the state to reward human creativity. Owning such an asset is not something the state needs to subsidize with a tax break; simply owning it should be enough.
It is also worth remarking that cutting a firm’s tax bill by one means or another does not directly achieve anything in terms of genuine innovation: it is merely a wealth transfer to capital owners. It is probably fair to say that these facilities lure corporate bosses into taking their eye off what they do best, as they focus instead on the next tax-driven sugar hit.
Mr Gauke makes no attempt to disguise the fact that the underlying driver here is not to foster innovation at all, but the dynamic of international tax ‘competition.’ His ‘spur to innovation’ speech, delivered to a City of London audience, opened with the proposition that UK tax policy is determined by “market forces,” not by the UK government:
Because in a global business environment, it isn’t politicians – even those politicians like me, who are responsible for national tax policies – that make the ultimate call about which tax systems are the most competitive or the most attractive. It’s businesses like yours, and you vote with your feet.
That is an extraordinary statement, if you think about it.
There is no recognition here of even the possibility that cooperation between governments could protect tax bases worldwide in respect of the more mobile forms of income. It fully embraces the downward pressure on the corporate tax take that market forces impose.
The UK’s Patent Box regime is therefore best understood as an instance of unalloyed complicity on the part of the UK government with the global dominance of corporate capital over the state power to tax. That complicity on the part of a jurisdiction like the UK is extremely harmful to the corporate tax system worldwide and completely undermines the UK’s standing to push for multilateral tax reform.
Not only that, but there’s early evidence that the gross benefits to the UK itself – much paper-shuffling, with few jobs – come with associated tax costs which may be high. Let’s also not forget that a race to the bottom is a race: Ireland, which introduced its patent box in 1973, is now smarting from the UK’s recent moves, and the lawyers and accountants, some of the biggest beneficiaries of the patent box gravy train, are even trying to get the United States to join in.
Essentially, the “Patent Box” is an if-you-can’t-beat-them-join-them attitude to tax havenry, which is why its existence on the UK’s statute books marks the UK out as a rogue state in the world of corporation tax.