BIOTECanada is the national trade association representing Canada’s biotechnology sector. The Association’s 230 member companies are representative of the broader industry ecosystem in Canada which provide high-quality jobs to build successful enterprises in Canada which are transforming health, agriculture, and industrial market segments domestically and globally. It is on behalf of the member companies that BIOTECanada submits its recommendations for the patent box consultation.
The government made significant investments into building on the domestic life sciences ecosystem and enhancing Canada’s biomanufacturing capacity through Canada’s Biomanufacturing and Life Science Strategy, and Health and Biosciences Economic Strategy Table report. These investments and the corresponding life sciences and biomanufacturing strategies will accelerate the growth of Canada’s biotech sector from start-up companies to commercially viable companies beyond just a biomanufacturing response in a crisis. Importantly, the implementation of the federal biomanufacturing strategy, co-led by ISED and Health Canada, has begun to address the barriers hampering the growth and competitiveness of Canadian life science SMEs attracting record levels of investment capital being realized in recent years. Accordingly, this consultation represents a timely opportunity to improve the SR&ED tax credit to enhance the competitiveness of Canada’s tax environment and support the growth of Canadian companies at a critical time.
However, Canada is still lagging in research and development (R&D) while other OECD countries are increasing investments (Source: https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm). Following the pandemic, most other leading economic jurisdictions in the world are also investing heavily into their domestic life sciences sector’s as they too understand the vital role biotechnology innovation is playing in the global economy. Globally, the competition for biotech ideas, companies, talent, and investment has never been more intense. Accordingly, it is imperative that Canada be aggressive and ambitious to establish a globally competitive innovation environment to fulfil the maturity and capacity envisioned in the Biomanufacturing and Life Sciences Strategy and encourage companies to invest and grow here in Canada.The federal SR&ED program has been a significant competitive advantage for many early stage and larger biotechnology companies for which scientific research and development is their primary ‘commercial’ activity. Moreover, the credit also provides new and small innovative companies the ability to maximize their revenue stream to drive innovation forward more effectively.
To attract the commercial development and retention of biotechnology companies, Canada should establish a globally competitive tax regime for research and development intensive companies to compete with similar R&D tax incentives in other jurisdictions by implementing an IP Box measure for later stage innovation companies.
For biotech SME’s, investment capital is the lifeblood of successful research and innovation. However, it is important to recognize that investment is extraordinarily mobile; it will go to wherever it is provided the greatest security and return. Canada is home to numerous emerging and high growth biotech companies. Access to capital is precious and vital to survive to become anchor companies. Innovative companies are built on intangible assets such as patents, and given capital is available in other markets in far greater quantity, the SR&ED Tax Credit is an essential tool in meeting both of Canada’s objectives. Importantly, investors see the SR&ED Tax Credit as a competitive advantage for Canadian companies vis-a-vis companies in other jurisdictions that are competing for the same investment dollars. The IP box regime will also encourage Canadian companies to obtain and retain IP, which will also spur their growth.
In this context, BIOTECanada offers the following recommendations in response to the questions posed in relation to the creation of a Canadian Patent Box regime.
1. In contrast to its international peers, Canada has a net balance of payments deficit (receipts minus payments) on charges for the use of IP that has grown over the last two decades (see the chart below). In other words, businesses in Canada outlay more to entities in other countries for the use of IP than they receive from international sources for the same purpose. What sort of dynamics might be underlying this trend? What factors have contributed to Canada’s negative balance?
Industry Response:
Canada has highly skilled entrepreneurs, investors, global executives, and clinicians who create opportunities for talented young people from within Canada and across the globe. Over the past five years Canada’s biotechnology sector has been one of the top economic success stories- and momentum keeps building. The sector is attracting record- breaking levels of investment in emerging and established Canadian biotechnology companies.
A competitive tax regime which includes an IP box mechanism encourages companies to commercialize their IP in Canada and increases the likelihood those companies will further invest and remain in Canada once they are commercial. In the long term, the creation of jobs and company earnings will provide additional tax revenue for the government that would not exist if a company left to commercialize in another jurisdiction.
Importantly, a reduced corporate tax for R&D companies in Canada should be implemented as soon as possible and not delayed. High value Canadian biotech companies that are not yet commercial are making decisions now on where to invest (e.g.: clinical trials, manufacturing) and headquarter based on which jurisdiction offers the greatest opportunity to extend investment capital. For those companies, the implementation of an IP box when coupled with a strong SR&ED tax credit would be a significant incentive for companies to locate IP and operations in Canada.
2. Would implementation of a patent box regime improve Canada’s competitiveness as a location for developing, commercializing, and retaining ownership of IP? With respect to competitiveness as a location for developing IP, how would support through a patent box regime compare to support provided through the SR&ED program?
Industry Response:
Support through the SR&ED program is particularly important for smaller early-stage, pre-commercial companies. As companies attract more investment and move closer to being commercial (e.g.: selling products or platforms), measures such as an IP box become increasingly important and when coupled with the SR&ED tax credit would significantly increase the attractiveness of Canada as a country for domestic and international companies to headquarter operations and continue to grow.
3. How important are tax considerations in decisions regarding where to commercialize IP and where to locate IP? Which factors besides tax rates impact businesses’ decisions around where to locate and commercialize IP derived from R&D conducted in Canada? How should the Department of Finance account for these factors in determining how businesses might alter their behaviour in response to implementation of a patent box regime?
Industry Response:
Tax considerations are significant influencers for companies deciding where to headquarter and commercialize IP. Advancing biotech innovation is a very expensive and lengthy process. Finding ways to attract investment and make those investment dollars more impactful is a strategic priority for biotech companies. Recognizing this, several countries have already implemented an IP box regime to retain existing companies and attract companies from other jurisdictions. In 1973, Ireland became the first nation to develop a regime favourable to IP generated from R&D activities. In 2007, the Netherlands was the first country to officially introduce an IP box. Thereafter, several European countries followed suit, including Belgium, France, Hungary, Luxembourg, Spain, Switzerland, and the United Kingdom. China has also implemented an IP box regime. These countries are actively courting Canadian companies to move operations into their regions. Support through an IP box taxation relief regime in Canada for later stage biotechnology commercial Canadian headquartered companies operating in Canada will assist in keeping these companies from moving elsewhere.
Accordingly, the industry recommends the government implement an IP box mechanism in Canada to complement Canada’s strong R&D sector and increase Canada’s global competitiveness in attracting and anchoring IP.
4. What would be a competitive combined federal-provincial/territorial tax rate under a Canadian patent box regime?
Industry Response:
The reduced tax rate applied to qualifying income by an IP box varies among regimes globally, generally ranging from 0% to 15%. To be globally competitive, a reduced tax rate applied by an IP box should be within this range. (Ref. 2. R Atkinson & S Andes, Patent Boxes: Innovation in Tax Policy and Tax Policy for Innovation, The Information Technology & Innovation Foundation (Washington DC: ITIF, October 4, 2011)
5. The Action 5 Final Report identifies the IP assets that are in-scope of a nexus compliant approach. (footnote1)Should all these assets be eligible for a potential patent box regime in Canada? Are there differences in business practices with respect to different types of IP assets that should lead the Department of Finance to expect that commercialization and IP location decisions for each asset would respond differently to a patent box regime?
Industry Response:
BIOTECanada supports a nexus compliant approach to IP box taxation relief, covering IP assets such as patents, research tools, software, etc. developed by a biotech company in Canada.
6. If Canada were to implement a patent box regime, compliance with the nexus approach would require businesses to report detailed information around expenditures incurred in the development of eligible IP, similar to requirements in place under regimes in other jurisdictions that are compliant with the nexus approach. Drawing on experience with nexus-compliant regimes in other jurisdictions, please share any comments on challenges and best practices in this regard.
Industry Response:
In Canada, the province of Quebec was the first jurisdiction to offer an IP box as a tax incentive to companies operating in that jurisdiction and applies to a wide range of intellectual property assets. This attractive program provides Quebec-based corporations with a lower tax rate for the net income derived from the sale/rental of products or the provision of services embodying IP-protected inventions resulting from Quebec-based research and development.
(Ref 3.: https://www.smartbiggar.ca/insights/publication/quebec-s-ip-box-a-tax-incentive-for-the-commercialization-of-ip )
7. Are there design features of a patent box regime that the Department of Finance should consider specifically to limit new fiscal costs to the government?
Industry Response:
The argument of “fiscal costs to the government” associated with implementing a patent box regime does not take into consideration the long-term benefits when companies remain in, grow, and invest in Canada which far outweigh such “fiscal costs.” For Canadian biotechnology companies, an IP box will ensure these companies do not locate to other countries and instead attract other companies to Canada, contributing to the Canadian economy with well-paying jobs. A competitive tax regime including a Patent Box measure would also attract other companies to locate in Canada bringing jobs, investment, and additional tax revenue. In this context, Canada would benefit from increased tax revenues not only from the Canadian operations, but from foreign revenues as well.