Pharma

Patent box? Ticked. GSK’s $800M plans show Europe’s tax edge over U.S.

GlaxoSmithKline (NYSE:GSK) is investing nearly $800 million to build a new manufacturing plant in the United Kingdom, part of a capital investment effort that could create 1,000 new jobs. The new plant, in a region north of London, will be the company’s first new U.K. factory in nearly 40 years, GSK said in today’s announcement. […]

GlaxoSmithKline (NYSE:GSK) is investing nearly $800 million to build a new manufacturing plant in the United Kingdom, part of a capital investment effort that could create 1,000 new jobs.

The new plant, in a region north of London, will be the company’s first new U.K. factory in nearly 40 years, GSK said in today’s announcement. But beyond looking at the financial commitment and the jobs created, it’s also worth looking at why GSK is making this investment. The reason is not purely patriotism expressed by the U.K.-based company. It’s policy.  The reason, explains GSK CEO Andrew Witty, is something called “the patent box.”

The concept of a patent box might not be familiar to many in the United States, but it will soon become part of U.K. tax policy. Government leaders there approved the tax policy change to spur investment in R&D and manufacturing. The patent box — so named because of the box marked on the tax form — means that profits from U.K. intellectual property will be taxed at a lower rate. That gives GSK, or any other company for that matter, the incentive to bring work that had been outsourced overseas back to the U.K.

“We discover new medicines,” Witty told the BBC. “What this (patent box) encourages us to do is make them here as well and that’s exactly what’s underpinning our investment strategy.”

China has a patent box. So do seven European countries — Belgium, France, Ireland, Luxembourg, The Netherlands, Spain and Switzerland. In 2013, the U.K. will become be the ninth overall country to implement a patent box.

The United States has no patent box. That means income from U.S. intellectual property is taxed at corporate or individual rates. The Information Technology and Innovation Foundation, or ITIF, a Washington, D.C. think tank, frames its patent box support in the context of global competitiveness. The corporate tax rate for Organization for Economic Cooperation and Development countries has declined from 50 percent in the 1980s to less than 30 percent in 2009, the group says in an October report on patent box policy. Meanwhile, the combined federal and state rate in the United States has held steady at about 39 percent. The United States does offer other incentives. For example, the U.S. R&D tax credit was the world’s most generous in 1992. But now it is only the 17th most generous. While R&D tax credits are important, patent boxes provide a different incentive, ITIF argued. R&D tax credits incent research. Patent boxes provide an incentive for commercializing that innovation.

“Commercialization of innovation, rather than the simple conduct of R&D, is a key driver of economic growth,” ITIF said in its report.

GSK maintains its U.S. headquarters in Research Triangle Park, North Carolina, where the company employs about 5,000 workers. The company manufactures pharmaceuticals at a plant in nearby Zebulon, North Carolina as well as other facilities throughout the United States. A U.S.-based GSK spokeswoman said the pharmaceutical company would be supportive of a patent box incentive in the United States.

The GSK financial commitment to new pharmaceutical manufacturing is the second big GSK investment announcement this week. The pharma company said Wednesday it would team with Johnson & Johnson (NYSE:JNJ) and venture capital firm Index Ventures to launch a new $200 million fund to back early stage companies that are working to develop a single promising asset. Index said that the fund will focus on Europe, though it will also consider investments in the United States. To launch the fund, GSK and J&J each kicked in $50 million. If profits from portfolio companies result from intellectual property in the U.K., or the seven other European countries that have patent boxes, those companies will enjoy favorable tax rates compared to rates in the United States.

Despite uncertain economic conditions throughout the world, corporations do have cash to spend and some are now showing the willingness to spend it. GSK’s announcement today is an example of the role tax policy plays in determining where they spend it.

[Photo from stock.xchng user ba1969]