New Zealand tax law’s unfair treatment of intellectual property owners is undermining the Government’s efforts to encourage an innovation economy, according to an intellectual property commercialisation expert.
Paul Adams, Chief Executive Officer of intellectual property commercialisation firm EverEdge IP, says the Income Tax Act (2007) taxes patents and patent applications unfairly because it treats them as an asset when they are in someone’s possession, but taxes them as income when sold.
“Money spent on patents must be capitalised and therefore treated as an asset, rather than a tax deductable expense. Yet revenue earned from selling patents is considered to be income and taxed at income tax rates.
“From a tax perspective, patent owners are getting the worst of both worlds. This approach punishes innovators for developing intellectual property assets.”
Mr Adams commented that if Labour introduced an encompassing capital gains tax patent owners would be further penalised.
The approach to patent taxation has the potential to undermine the development of New Zealand’s innovation sector because it encourages innovators to locate their intellectual property offshore.
Relocating intellectual property offshore is even more compelling when New Zealand’s high tax rate on royalties is taken into account. Other countries, such as Singapore, Belgium, Spain and the Netherlands, are attractive because they have very low tax rates for income derived from intellectual property.
Mr Adams is aware of a number of New Zealand businesses that have relocated their intellectual property overseas as a result of our tax regime.
“This legislation makes absolutely no sense. R&D tends to base itself where intellectual property is held. With this regime there is no incentive to keep patents in New Zealand. The country ends up missing out on high value job creation, innovation and export revenue.”
Further the law is not well understood and many companies are unaware of the situation.
“This anomaly is an obscure part of New Zealand’s taxation law. People are being caught out because they don’t realise that selling intellectual property, even in the context of a receivership, liquidation or restructure could create a substantial tax liability.”
He notes that the specialised nature of valuing and transacting intellectual property means that few accountants understand the law’s implications, so they are not bringing it to their clientsÕ attention.
Mr Adams advises innovators and those who own patents or patent applications to seek expert intellectual property commercialisation advice on how to fulfil their tax obligations when valuing or dealing with their intellectual property.
“It simply does not make sense to tax innovation in the current way,” he says.
“As much as it pains me to say it, New Zealand innovators should be thinking long and hard about where best to locate their intellectual property.”