The topic of corporate taxation abroad and at home continues to become more and more prominent as governments try to encourage innovation and growth but also balance out-of-control budgets. The UK has recently proposed an interesting tax break for innovation aimed at fostering growth and keeping new innovation within its borders. The Patent Box proposal offers a tax break on all corporate profit that stems from new patents. Profit from new patents would be taxed at 10% instead of at the current corporate taxation rate of 25%.

The Patent Box will include some other forms of intellectual property (IP) that have a strong link to research and development (R&D). However, for good reason, copyright and trademark profits will not be included in the Patent Box because they do not have a strong link to R&D when it comes to high-technology and industrial growth.

The key behind the Patent Box is to encourage new innovation to remain in the UK and not move offshore. This has been a growing problem in the UK and even more so in the US. Recent OECD numbers show that as much a $1.4 trillion in US business profits are “locked” overseas. The high combined (state and federal) rate of corporate taxation in the US (39.1%) keeps these profits offshore until businesses can take advantage of temporary tax breaks. The UK corporate tax rate of 25% which is scheduled to decrease to 23% by 2013 is not as problematic as the US but is not as low as the competitive rates of its neighbors.

To enforce uniformity and avoid having to look at each patent individually the Patent Box only provides a tax break for the patents that have been validated by the IPO or the EPO, but provide a review process for patents filed elsewhere. It also limits the inclusion of UK firms that filed patents elsewhere when they could have been filed in the UK. Other limitations specify that only patents commercialized after Nov. 29th 2010 will be accepted into the Box. This rule will limit firms from trying to capitalize on older patents and instead focus on making new ones. However, figuring out when each patent was commercialized is not an easy task and could limit the success of the proposal.

UK officials hope that this new proposal will inspire technological growth in the UK without creating distortions in how firms invest in R&D and innovation. There may be extensive problems in how the tax break actually works as pointed out by Hellen Miller from the Institute of Fiscal Studies, but research shows that the new proposal will at least lead to more patents staying in the UK even if there is no new innovation that stems from the tax incentive.

Deficits and sluggish growth have caused governments to tighten belts and look for new ways to help nurture long-term growth. To conquer these problems governments have started to look for answers outside the box, but for the UK the answer seems to be to put things in a box.