An Intellectual Property Box for Canada : Why and How

The key argument in favour of an Intellectual Property (IP) Box, which taxes the income generated from intellectual property at a special low rate, is that it defends against poaching of highly mobile IP income by low-tax jurisdictions, particularly tax havens. The standard response to this argument has been that IP Boxes will intensify competition for mobile tax bases, which will eventually drive the tax rate on IP income to zero.However, this counterargument has lost its force because of the general acceptance that preferential tax treatment must be linked to real activity in the implementing jurisdiction and because of the tentative agreement on a global minimum corporate tax rate. With these two developments, an IP Box protects the tax base without engendering tax competition for highly mobile IP income.An IP Box has two other advantages in the current environment: it encourages additional investment in research and development (R&D) and commercialization activity in the implementing jurisdiction.There are two key design features that must be adopted to maximize the benefits of an IP Box.- First, income from all assets developed from R&D performed in Canada, not just patents, must qualify for special treatment.- Second, qualifying income must include not only explicit royalties and licensing fees, but also implicit IP income embedded in products sold, or in production processes developed from R&D performed in Canada.A carefully designed IP Box is likely to be a more cost-effective way of promoting innovation by large firms than an increase of equivalent value in the regular Scientific Research and Experimental Development (SR&ED) investment tax credit. The impacts on R&D are likely to be similar, but the fiscal cost would be smaller because of a reduction in outbound profit shifting