IP Box: Would a special IP income tax rate boost Canada’s flagging innovation?

April 19, 2022 Enterprise, Entrepreneurs, Start-ups, Small Businesses, FinTech and Alternative Finance, Innovation and Resources, Leadership, Productivity, Competition, Human Capital, Health, Stories No comments

C.D. Howe | John Lester | Apr 5, 2022

IP box - IP Box: Would a special IP income tax rate boost Canada's flagging innovation? Canada needs to create an Intellectual Property (IP) Box to improve its lacklustre innovation performance, according to a new study from the C.D. Howe Institute. An IP Box would tax income from patents and other intellectual property at a special low rate. This initiative would boost Canada’s flagging business investment in R&D, raise our low commercialization rate, and stem an outflow of IP profits to tax havens.

Author John Lester examines Canada’s case for an IP Box, and describes how it could be designed and implemented.

See: A new way of measuring the elusive value of intellectual property

The key argument for this measure is that it defends against “poaching” of highly mobile IP income by low tax jurisdictions, particularly tax havens, writes Lester. The standard counterargument is that IP Boxes trigger competition for mobile IP income, which will eventually drive the preferential tax rate down to zero. However, this criticism has lost its force due to two developments. The first is an OECD-inspired international agreement that income taxed at a preferential rate must be derived from R&D performed in the implementing jurisdiction. The second is the tentative agreement on a global minimum tax rate. With these two developments, an IP Box can protect Canada’s tax base without engendering competition for highly mobile IP income.

“An IP Box is a cost effective way to boost R&D and commercialization in Canada because it is partly financed by tax revenue recovered from tax havens,” says Lester.

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