I move: “That the Bill be now read a Second Time.”
I am pleased to present the Knowledge Development Box (Certification of Inventions) Bill 2016 to the House for consideration. The main purpose of the Bill is to establish a certification scheme to allow small and medium-sized companies to avail of the Knowledge Development Box.
When implemented, the Bill will allow companies with intellectual property assets that are non-obvious, useful and novel to qualify for the Knowledge Development Box. The Bill will establish a certification scheme to be administered by the Controller of Patents, Designs and Trade Marks. The controller will issue certificates to SME companies if applications under the certification scheme meet the criteria of being non-obvious, useful and novel.
The Knowledge Development Box, KDB, was introduced in the Finance Act 2015 as a tax incentive to encourage innovation and boost research and development. Under this initiative, a corporate tax rate of 6.25% will apply to profits on intellectual property assets that result from research and development carried out in Ireland. The Finance Act provides that three distinct categories of intellectual property qualify for the KDB. These are patents, copyrighted software and inventions that share the characteristics of patents in that they are novel, non-obvious and useful. It is the third category of intellectual property assets that the current Bill is concerned with and for which a new certification scheme is proposed. The KDB is already operational for the first two categories, patents and copyrighted software, since 1 January 2016.
This third category of assets is targeted at small and medium-sized companies with a view to ensuring that they too can qualify for the KDB. The Finance Act imposes certain financial limitations on the definition of companies that qualify in this category. The limitations are for companies with income arising from intellectual property of less than €7.5 million and with global income of less than €50 million. The legislation will, when enacted, be of direct benefit to companies of a relatively smaller economic scale. We have almost 2,000 companies performing R&D activities in Ireland with turnover under €50 million and they will be able to access the KDB through this proposed new scheme.
A secondary purpose of the Bill is to re-introduce substantive patent examination for Irish patents. Under the Patents Act 1992, the activity of substantive patent examination was discontinued at the Irish Patents office. The Finance Act provides that in order for patents to qualify for the KDB they must be granted following a process of substantive patent examination. This is designed to ensure that only the highest quality patents qualify for the KDB.
The amendments in the Bill to the Patents Act have the effect of reintroducing substantive patent examination in Ireland. This will result in higher quality Irish patents in line with best international practice. Moreover, the intention is to ensure that Irish patents will continue to qualify for the KDB.
Evidence shows that investment in R&D increases economic productivity, competitiveness and improves health, social and environmental outcomes. Firms with a persistent R&D strategy outperform those with an irregular or no R&D investment program. R&D is crucial for creating and maintaining high value jobs and for attracting new business. However, it is the case that depending on the product or process, R&D can be very expensive and not all R&D is successful. A company may experience many failed attempts before it sees results from investment of time, money and resources. These can be considerable, particularly for SMEs. Therefore the extension of the KDB to indigenous small and medium-sized companies is expected to incentivise greater levels of innovation with a view to leading to increased job creation. Promoting innovation is a concern for me in my role as Minister of State with responsibility for innovation.
By way of background, I should say that the KDB was introduced in response to the OECD’s consideration of harmful tax practices. Ireland has the first fully compliant Knowledge Development Box that meets the new OECD guidelines, developed following this consideration. The overall KDB scheme comes within the area of responsibility of the Minister for Finance.
The report on tax expenditures published with the budget in October 2015 provides an ex ante evaluation of the KDB scheme. This evaluation outlines the basis of the best estimate of tax forgone for the Exchequer of €50 million. This €50 million is in respect of’ all aspects of the KDB, including the certification scheme aimed at SMEs, which is the purpose of this Bill.
All tax expenditures are reviewed on a regular basis in line with the Department of Finance guidelines for tax expenditure evaluation published in October 2014. These rules apply to the Knowledge Development Box and an evaluation will take place within five years of the introduction of the scheme. The review of the overall KDB scheme will be a matter for the Minister for Finance.
A certificate granted under this Bill provides the gateway for SMEs to apply the 6.25% corporate tax rate on profits arising from the invention. Grant of a KDB certificate does not, however, guarantee that the SME qualifies for this lower rate of corporation tax. Revenue will consider tax returns on the basis of the provisions applicable to the KDB scheme introduced by the Minister for Finance in the Finance Act 2015 that came into effect on 1 January 2016. Revenue will have the necessary information on the KDB to provide reliable information to Government on an ongoing basis on the use of the KDB to inform future evaluations of this initiative.
I will now turn to the specifics of the Bill and set out what each section is intended to do. As I have already mentioned, the intention in the Bill is to introduce a certification scheme for SMEs in respect of their intellectual property assets in the nature of inventions. This scheme involves the Controller of Patents, Designs and Trade Marks as the designated State authority to certify the assets as being novel, non-obvious and useful. When examining applications under the scheme, the controller will apply the same criteria used to establish novelty and inventiveness as that which currently applies to patents.
Unlike patent holders, companies granted a KDB certificate will not have to publicly disclose the nature of their invention. Nor will they have a monopoly and market exclusivity rights for that asset. The certificate will assist SMEs to qualify to apply the lower rate of corporate tax of 6.25% to profits arising from the IP asset. This is half the normal corporate tax rate of 12.5%. Let me be clear that the KDB certificate will not of itself automatically mean that a company qualifies for the lower tax rate. The Revenue Commissioners can, and will, carry out their own assessments to ensure that a valid basis exists for the company to claim the lower rate of corporate tax. This practice already exists in the context of the R&D tax credit scheme where Revenue can randomly undertake assessments or audits. The certificate is one step in the qualification process for the lower tax rate. Companies that can qualify for this certification scheme are those with less than 250 employees and income of less than €7.5 million arising from intellectual property. Global turnover from intellectual property must be less than €50 million. The profits must result from R&D activities carried out in Ireland.
The second purpose of the Bill is to amend the Patents Act 1992 by requiring that in the future all Irish patents granted will be on the basis of substantive patent examination only. Under the current system, it is possible to grant Irish patents on the strength of evidence of novelty in the form of a search report. These amendments will ensure that all Irish patents granted after this Bill is enacted will be of a high quality in line with best international practice.
Moreover, it will ensure that all patents granted by the Irish Patents Office will continue to qualify for the KDB.
I propose in this Bill to introduce a substantive patent examination regime for Irish patents. These changes signal a change in the manner in which the Patents Office will examine patent applications in the future. The Irish Patents Office has a long standing arrangement with the UK Intellectual Property Office to provide evidence of novelty in the form of a search report. When the Bill is enacted, a search report alone will no longer satisfy the evidence of novelty requirements but will in addition require a written opinion. This additional service is also being acquired from the UK patent office. That is patentability. We will require an opinion on that.
Looking at the Bill in detail, Part 1 includes sections 1 to 3 and contains standard legislative provisions relating to Title, commencement, citation, definitions and expenses.
Part 2 contains sections 4 to 6 and sets out the mandatory criteria that applications for inventions under the scheme must meet. This part sets out also the mandatory exceptions and these are common also to the exceptions that apply in patent law. Section 4 sets out the criteria that an invention must meet in order to qualify for a KDB certificate. Put simply, the invention must be novel, non-obvious and useful. This section also lists those inventions that are not considered to be inventions for the purposes of KDB. For example, the invention cannot be granted a certificate if it is a discovery or a scientific theory. Section 5 defines specific inventions that are excluded for reasons such as that the commercial exploitation of the invention would be contrary to public order or morality or that the invention is a plant or animal variety derived from a biological process. Section 6 provides that a KDB certificate will typically issue for one distinct invention.
Part 3 contains sections 7 to 15, inclusive. It deals with the specific and detailed application requirements under the scheme to the controller, including an outline of the controller’s decision-making process and review process.
Section 7 sets out the qualification criteria and financial limits for companies that can apply under the KDB certificate scheme and establishes the information requirements for applications under the scheme. Essentially, the application will have to contain the title and a clear, concise, detailed description of the invention, the date on which the invention began to be used, produced or marketed, the novel features or improvements of the invention that did not previously exist, along with a description of its advantageous effects, and be accompanied by an opinion from a patent agent attesting that the invention is novel, non-obvious and useful.
Section 8 deals with applications that are submitted but do not initially meet all the requirements laid out in section 7. The controller can write to the applicant identifying the requirements that were not met. The controller can defer consideration of the application until the revised application is submitted. If no response is made to the controller’s notice the application is deemed withdrawn after a period.
Section 9 provides for the treatment of applications in respect of two or more inventions. A certificate can typically be issued in respect of a single invention only. Under section 9 the controller can invite the applicant to choose which element of the invention should be considered for certification purposes. The applicant can make a separate application or applications for the other inventive elements of the application.
Section 10 allows the applicant to withdraw an application at any time before the issue of a KDB certificate.
Section 11 provides that an applicant who initially withdrew an application is not prevented from lodging the same application again at a later date.
Section 12 provides that the controller can issue a KDB certificate if he is satisfied the invention meets all requirements set out in Part 2. It also outlines the particulars that will be included on the KDB certificate.
Section 13 outlines the procedures to be adhered to if the controller refuses to issue a KDB certificate. In this situation the controller must clearly set out the reasons in writing for the refusal.
Section 14 offers the applicant a review of the original decision. This involves an internal appeals process in which the reviewer will be of a grade senior to the original deciding officer. This reviewer will confirm or cancel the original decision. Under section 15 an application containing new information may be made in respect of an invention for which a certificate has been refused.
Part 4 contains sections 16 to 19, which deal with the administration of the KDB certification scheme. Section 16 allows the controller to authorise officers of the Patents Office to carry out functions under the Bill on his behalf. This is typically to allow the patent examiners at the office to examine applications under the scheme.
Section 17 deals with the confidential nature of the KDB certification applications. The controller is required to keep records of all applications received, certificates granted, refusals to issue a certificate and reviews undertaken. As applications will contain commercially sensitive information it is essential that they be kept confidential. The controller will not disclose the invention publicly or advertise it in any way. This section also provides that anyone dealing with an application on behalf of the controller will be guilty of an offence if they disclose information submitted in support of the application.
Section 18 provides for an annual report containing statistical information to be provided by the Controller of Patents, Designs and Trade Marks to the Minister of Jobs, Enterprise and Innovation as part of the controller’s annual report. This report will be laid before the Houses of the Oireachtas. Section 19 is a standard indemnity provision protecting the controller and his staff from legal proceedings as long as they have acted in good faith in the course of their official duties.
Part 5 of the Bill contains sections 20 to 24, inclusive. Section 20 creates an offence for the forging and use of forged documentation under the Bill. Section 21 enables the Minister to make rules providing for fees and time periods referred to in the Bill. Section 22 creates an offence whereby an officer of a corporate body that commits an offence, is also guilty of the offence. Section 23 is the standard provision concerning the disposal of fees to the Exchequer. Section 24 enables the controller to specify the form of any document referred to the in the Bill.
Part 6, containing sections 25 to 31, amends a small number of provisions in the Patents Act 1992. The amendments have the effect of reintroducing substantive patent examination for Irish patent applications. Substantive examination involves the detailed examination of a patent application to assess novelty and inventive step.
Section 26 is a transitional provision intended to cover the position of patent applications filed under the Patents Act 1992 but before the coming into effect of the amended provisions in this Bill. It clarifies that the new regime will apply to patent applications made after the Bill is commenced. Applications made prior to this date will continue to be processed under the provisions of the Patents Act 1992.
Section 27 amends section 29 of the Patents Act which requires that a report and a written opinion as to patentability must be filed with the office. It is against this evidence that the Patents Office will substantially examine the application. Section 28, which amends section 30 of the Patents Act, enables the submission of similar evidence of novelty from a foreign patent office. Section 29 allows the controller to consider observations from third parties on the issue of the patentability of an invention. Section 30 amends section 31 of the Patents Act. It empowers the controller to refuse a patent application that does not comply with the requirements as to novelty, inventive step and industrial application.
Section 31 of the Bill amends the annual reporting provisions in section 103 of the Patents Act. Whereas the controller currently lays his annual report before the Oireachtas, the changes introduced by the Bill will require him to make his annual report to the Minister who in turn will lay it before the Oireachtas. This is in keeping with current good corporate governance practices applicable to offices and agencies.
I am pleased to commend this Bill to the house. I look forward with interest to the contributions of Members on this and subsequent Stages of the Bill.