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Broken tax laws disadvantage innovators

Innovators get short shrift under New Zealand's tax laws, which Paul Adams says are well overdue for an overhaul.

Paul AdamsPatents can be big business. Nortel recently sold its patent portfolio for a record US$4.5 billion to a consortium of Apple, Microsoft and four tech players, and Google responded by acquiring Motorola’s handset business largely for its patents.

Patents also play a crucial role in developing an innovation economy – yet New Zealand governments don’t appear to appreciate patents‘ economic value. That’s because New Zealand tax law actively discourages patent ownership.

An obscure provision of the Income Tax Act (2007) requires patent owners to capitalise any patent expenditure (treating the patent as an asset) but if the patent is sold, the owner must pay income tax on the sale proceeds (treating it as income). In other words patent owners get the worst of both worlds. This law applies to New Zealand patents and foreign patents held here.

Logically, patents should either be:

  • treated as an asset whereby expenditure is capitalised and sale proceeds are tax free or;
  • patent expenditure should be expensed and income tax should be paid on any patent sale proceeds.

New Zealand’s inconsistent approach is economically unsound and actively punishes innovators for developing valuable intellectual property. Innovation is central to New Zealand’s future economic progress, which the current government seems to understand, but it doesn’t appear to appreciate how growth can be stifled by unevenly taxing the very assets driving that process.

Ironically, the current policy encourages innovators to locate their intellectual property offshore. Depending on the jurisdiction, innovators can either expense costs as they go (reducing cash burn), or build up a high value asset (then sell it tax free). This is exactly what savvy New Zealand innovators companies are doing because patents, being intangible assets, are relatively easy to shift offshore.

R&D tends to base itself where intellectual property is, yet the current regime discourages locating patents here. As a result, the country ends up missing out on high value job creation, innovation and export revenue.

While some companies are voting with their feet, others are unwittingly creating major tax liabilities. The law relating to patent taxation in New Zealand is poorly understood even by accountants, so most are not bringing it to their clients’ attention.

Many don’t realise that when their client sells a patent (or a patent application) they are likely to be creating a substantial tax liability, even where the “sale” is in the context of a receivership, liquidation or restructure.

There are plenty of potential pitfalls for the unwary and those who own or plan to transact or value patents are advised to seek expert intellectual property commercialisation advice on how to fulfil their tax obligations properly.

As much as it pains me to say it, until New Zealand adopts a more sensible patent tax regime local innovators are advised to think long and hard about where best to locate their intellectual property.

Paul Adams is chief executive of EverEdge IP.