A patently obvious mistake?

26 Apr 2007

In recent weeks the Irish Government made a change to its patent tax law that some have speculated could move high-value jobs out of the State.

Last month, the European Commission formally requested that Ireland remove a provision in its patent tax law by which royalties on patents are exempt from tax only if research leading to the patent was carried out in Ireland. The provision was incompatible with the freedom of establishment and the free movement of services allowed for under EU laws, the commission said.

Some weeks prior to the commission’s request, however, the Irish Government had already amended the law in the 2007 Finance Bill.

Consequently, from next January the definition of a qualifying patent for the Patent Royalty Tax Exemption scheme will change so as to provide that work leading to a patented invention can be carried out within a state of the European Economic Area (EEA) rather than just in Ireland. Also, a limit of €5m will also be imposed on the aggregate amount of patent income to be exempt for tax purposes.

The move has caused some consternation among industry in Ireland. Michele Quinn, director of the Irish Software Association, has described it as “frightening”.

She said: “This obviously will have several consequences and repercussions on the industry generally. For instance, to avail of this relief companies have had to ensure that the costs of research were borne in Ireland as the patent had to be developed here. That requirement will now be dropped.

“This means that companies will have an incentive to incur expensive R&D costs in those jurisdictions where they are exposed to high tax rates, eg US, Germany, France, etc.”

Donal O’Connor, senior partner with Cruickshank Intellectual Property Attorneys, said it would become a vehicle to allow companies to repatriate funds to lower-corporate tax environments like Ireland without having to invest in R&D jobs here.

“Take large corporations: they would simply put all their patents into Ireland and then license all the European countries with their patents. Because the R&D can now take place anywhere, they would get those patent royalties free of income tax. They would repatriate patent royalties out of France, Belgium, England, Germany, Italy and so on. To do that would be an appalling vista.”

Multinational software player Microsoft is less perturbed by the changes. Head of corporate affairs Terry Landers contends that any advantage accrued for the State from the Irish-only element in our patent tax system would have been countered eventually by other countries offering similar tax schemes to incentivise R&D.

“I would expect the approach we’ve taken to be replicated across other countries. Most countries are looking at what is best practice and what is allowable; this type of scheme is well noted and recorded by the OECD and one would expect that over time various other countries would implement similar schemes.”

His reasoning is based on the fact that one of the EU objectives is to have 3pc of GDP spent on R&D by 2010. “There is an expectation that two thirds of that would be contributed by the private sector, so governments are creating schemes to incentivise more R&D,” he says. “You’ll find every country that is pursuing the knowledge economy is developing these schemes.

“The EU is a vehicle for sharing best practice in terms of policies. Over time successful policies will tend to be adopted more broadly than in just one country.”

A spokesperson for the Department of Enterprise, Trade and Employment downplayed any negative repercussions the change could have. “R&D has an expanding role to play in the future development of the Irish economy. In this context, the Patent Royalty Tax Exemption scheme is regarded as an important component of Irish tax-based support for R&D.

“It should be emphasised, however, that existing multinationals performing R&D in Ireland have the benefit of our 20pc R&D tax credit scheme and our 12.5pc corporate tax rate, which will act as strong incentives to keep R&D activity here.

“In fact, the change may improve Ireland’s overall position as a European R&D hub by allowing part of the work to be undertaken elsewhere in the EEA, as the previous requirement was not always consistent with the commercial realities of a global market,” the spokesperson added.

It should be noted that changing the provision frees up indigenous Irish companies to outsource R&D to other EEA countries while continuing to avail of the exemption.

The Government had little choice in changing the provision as the European Commission could have brought it to the European Court, but is there a way it can mitigate the threat of Ireland losing all the benefits of the original scheme?

O’Connor thinks there is, and it revolves around removing the exemption for royalties from the corporate tax system and putting it into the personal tax system.

“In my view the way is to take the operation of the incentive out of the corporate tax system and bring it simply and solely to inventors and individual patentees, and ideally to shareholders. It’s the SME and reasonably small, closed companies that have traditionally been helped by this incentive. If we limit it to individuals and shareholders of patent-holding companies in this country then there is no advantage to a large company.”

He suggests a company with the normal 12.5pc rate would simply deduct the tax from the dividends paid to the resident Irish shareholder who can then reclaim them, the same as a credit against tax in any other way.

Quinn calls into question other aspects of Ireland’s tax incentives for R&D. She is critical of the fact that the existing R&D tax credit scheme doesn’t benefit smaller indigenous firms.

“We are pushing for the tax credit scheme for R&D to be broadened out to allow more companies to qualify and what we are pushing for is that it’s not just to get corporation tax paid but it’s against PRSI.

“If it’s allowed against PRSI costs then it means that a much wider range of companies, particularly on the indigenous SME side, would qualify for the scheme. It would incentivise R&D because at the moment it’s only an incremental scheme and it’s for companies that are paying corporate tax.”

She says the model has been successful in the Netherlands where the tax credit is charged against PRSI.

Another huge issue for companies developing intellectual property, not just in Ireland but also across Europe, is the ongoing efforts to create a Community Patent. Like many of the EU’s big ideas it has almost unanimous support but virtually no agreement on how to implement it.

The stumbling blocks are political objections to having a core languages policy for patents and to a single-jurisdiction Europe-wide patent court.

At present, companies can file a patent in their own country or they can go to the European Patent Office (covering 30 countries) and file a European patent.

A European patent is effectively a bundle of national patents. “When the European patent is granted it becomes a bundle of national patents. The inventor can decide he wants those patents running in all the countries, or some of them, or one of them.

“In each of the countries he keeps the patent alive by paying renewal fees until the 20th year when it runs out and anyone can use it,” explains Gerard Barrett, head of administration with the Irish Patent Office.

There is also a third way to file a patent, explains Barrett, which means going to the World Intellectual Property Organisation in Geneva as part of the Patent Co-operation Treaty between industrialised countries. The patent application in this instance would again be referred to the European Patent Office for examination.

As it stands, it is estimated that filing a European patent designating 13 countries is 11 times more expensive than filing a US patent and 13 times more expensive than filing a Japanese patent, underlying the desirability of reaching agreement on a shared patent.

The European Commission recently reignited talk on the Community Patent by calling for stakeholder consultation on the issue via an official Communication. The rallying point this time is the attempt to set up a EU-wide patent court.

“Currently, the problem is the fact that you file in multiple countries with multiple jurisdictions with potentially multiple local laws, the nuances of which could change the interpretation of the patent,” says Landers.

“What people doing R&D want is if not certainty at least some level of predictability that they can protect what they’ve developed and filed. What you don’t want is to have the risk of multiple patent litigation in several countries on the same issues, which would be costly for all parties involved. You’d also have potential uncertainty about the outcome: it might be different in Lithuania, Poland, etc.”

Translation costs are another obstacle to the Community Patent. The European Council’s Common Political Approach of March 2003 required that the patent claims be translated into all official languages of the EU. There are issues in particular around the legal effect of the translations of patent claims where these are inaccurate.

“In order to make the Community Patent work we couldn’t have a situation where you had to file in every single language, especially every official language, eg Irish, Catalan, Galician. It would just become unmanageable. Various attempts to have some kind of core language coverage have met with objections,” says Landers.

Quinn remarks: “The lack of sufficient legal certainty in the current European patent system is a serious barrier to increased take-up of European patents by SMEs and larger companies across Europe.

“There should be one coherent patent structure in Europe, which would make it possible for European, national and Community patents to co-exist without confusion or overlap. It is furthermore essential that all features of the European patent system are compliant with the World Trade Organisation TRIPS agreements and are compatible with patent laws of third countries, in particular those which are perceived as key competitors with Europe, such as the US and Japan as well as Singapore, China and India and other emerging economies.”

Whether agreement is ever reached is impossible to predict, according to the Department of Enterprise, Trade and Employment, which described it as a “very tough nut to crack”.

“Whether or not member states will demonstrate a will to find consensus on a way forward should emerge from their reactions to the European Commission’s recent Communication,” a spokesperson said. “A political compromise that results in a model that will work only in theory and which industry will not use in practice is not worth pursuing. We must have an instrument that is affordable, provides legal certainty and is attractive to industry.”

Can you patent an idea?

Amazon has recently been brought to court in the US over its One-Click payment patent. New Zealander Peter Calveley alleges that Amazon.com is “essentially claiming the idea of seeing something, clicking on it and automatically purchasing it”.

Calveley maintains that the One-Click system is such an obvious and trivial idea that it’s impossible to award the patent to anyone.

Microsoft has built up a large patent portfolio, so much so that critics have accused it of stifling competition and nudging out smaller companies through patent litigation.

What can be patented and what should be patented are hotbeds of dispute, leaving patent attorneys, of which there is a growing cache in Dublin, in the pink.

“In Ireland, the legislation states that if you’re dealing with something extremely hi-tech or has software embedded in it then it must have some form of technical character to it,” says Karen Ryan, patent examiner with the Irish Patents Office. “There must be some technical effect performed by it for it to be granted a patent.”

Legislation around patents in the US is much more relaxed, leading to a wide range of software patents being in place. Business methods are also patentable, which they are not in Ireland.

The complicated nature of technological advancements means national patent offices often don’t have the resources to determine eligibility for patents. “Patent offices are usually not terribly large and where they need expert opinion they will go to the main experts,” says Microsoft’s head of corporate affairs Terry Landers. “The technology is moving more quickly than the legislation.”

By Niall Byrne

Pictured – Donal O’Connor, senior partner with Cruickshank Intellectual Property Attorneys