Saturday, 9 February 2019

Patents, taxation thereof.

Income from patents is "rent" because it can only arise as a result of government protection, so it seems fair enough to me if a government wants to collect a bit of extra tax from patents. The amounts involved are a tiny fraction of land rents, so I'm not overly bothered, but the principle stands.

The nay-sayers claim that people will just register their patents off-shore, which under current rules can produce a tax saving (because the rules are stupid). But this is similar to the claim that foreigners wouldn't pay LVT on land and buildings they own in the UK or that UK landowners would evade the LVT by registering the land in the name of an off-shore company, which is clearly drivel on the facts.

The same applies to patents. The source of the income is not the patent itself, it is the income from selling the patented products. So the best way of taxing patent income is for the UK government to levy an extra tax on the sale of patented products in the UK, the same as it collects fuel duty from fuel sold in the UK, or booze and fags duty from booze and fags in the UK. It does not matter where the booze or fags were made, or who owns the factory which makes them. The tax is the same.

(Admittedly, tobacco duty in the UK is so stupidly high that smuggling is worthwhile, and they might be past the top of the Laffer Curve, but the principle stands, and most people love bashing smokers, so politically, it is seen as A Good Thing).

Current rules on patent income are stupid, because they go downstream and try to tax the income received by the patent holder. Wrong, it is best to tax that income at source i.e. the actual sales of patented products to end users.
I envisage something like this, taking cars as an example...

Somebody, car manufacturer or inventor, in the UK or abroad, patents some car components and wants the UK government to give legal protection against competitors embedding similar components in cars which they sell in the UK.

He notifies the UK government that car model such-and-such includes patented components and pays the tax on the selling price of the new such-and-such models he sells in the UK.

It's up to the car manufacturer (or indeed the car manufacturer and inventor together) to decide whether they are willing to pay for that protection or not; or indeed use non-patented components on UK models.
It doesn't matter who discovered the idea; or where the patent is registered; or who has registered it; or who manufactures the products; or where they are manufactured. All we tax is patented products sold in the UK. You can invent any permutation you like, the rule is the same...

a) UK inventor gets patent royalties from a manufacturer abroad? He does not pay the tax.

b) UK manufacturer pays royalties to patent owner abroad? No tax on that, only tax on the patented products which the manufacturer sells in the UK.

c) UK inventor registers patent off-shore and is paid the royalties there? So what? Why would he even bother? The royalty payments themselves are not taxed in the UK anyway, see example a).

d) Foreign manufacturer sells patented products in the UK? The tax is on the total value of UK sales.

e) UK manufacturer makes patented products and exports most of them? The tax is only due on UK sales. Exports are not liable to UK patent tax.

And so on.
Is it a perfect system? No of course not. But we know that fuel, booze and fags duty "work" on an administrative level. The same general rules apply here.

Is it far more coherent than the current system? Certainly: it's like a very focussed VAT, with much lower dead weight costs.

How high do we set the rates? Depends on the product. Items with low production costs and high margins (medicines, software) get a high rate (50%?) and items with high production costs and low margins (cars, consumer electronics) get a low rate (5%?).

There's a Laffer Curve to this, and we pitch the rates at something lower than revenue-maximising rate.

How much would the tax raise? No idea, but either we get more money, or we get more competition/innovation. Win-win!
It doesn't matter what other countries do.

PR China does not care about copying and patent infringement, so were PR China to demand such a tax, people would laugh in their faces and tick the box saying "While this product is patent protected in the rest of the world, we know that you will turn a blind eye if Chinese manufacturers copy it, the protection you offer is worthless so we won't bother paying it on sales in PR China, thank you very much."

In this example, it's not like car manufacturers will say, "We don't want to pay the 5% in the UK, so we'll only sell this model in countries with no patent tax", because the 5% tax on cars will have been set at much less than the extra profits they can make as a result of included the patented components in cars they sell in the UK.

Wealthy countries with a good legal system will be able to charge higher rates of tax than poor countries with a corrupt-ineffective-expensive-complicated legal system, so it motivates governments to make sure that their country is wealthy and their legal system is accessible, quick, low cost and effective, that way they can collect more patent tax. Reward for good behaviour!
Same goes for franchise payments. Starbucks siphons money out of the UK by charging people (franchisees) for use of the name, logo, cup design etc. The branding is clearly being exploited in the UK, it's a UK activity/UK source of income, so that would be liable to normal UK corporation tax.


Ralph Musgrave said...

Mark, If you're interested in patents, what do you think of Mariana Mazzucato's stuff? She is very much into patents, innovation, etc though whether she knows what she's talking about is another question.

Mark Wadsworth said...

RM, can you link to her blog or something?

Ralph Musgrave said...

Hi Mark,

Her book is entitled “The Value of Everything”:

A Medium article of hers (where I left a comment):

Another article:

Re patents, she is a strong opponent of the existing set up with big pharma. I'm sure there's something about that in her book. Not sure if there's anything in those two articles. It's here "mission orientation" idea that particularly irritates me.

mombers said...

Software should just be ineligible for patenting. Copyright protection is adequate to prevent low/no cost exact copying, much the same as copying patented medicines. Most software patents cover such ridiculously broad concepts that I could conceivably be violating dozens of patents every day...

Mark Wadsworth said...

RM, thanks for links, I'll have a look.

M, I agree, but there is no point arguing the merits of it, the UK is bound by the Treaty of Rome and the rules are internationally harmonised. I'm working within confines of what we've got.

Mark Wadsworth said...

RM, I slogged half way through and then gave up and skipped to your comment instead, which is clear English and 90% of which I agree with :-)