Patents and trade secrets are the primary means of intellectual property protection and play an important role in innovation and economic development. The issue of corporate tax avoidance by ICT multinationals and the debate on the introduction of digital taxes has significant implications for countries’ economic strategies and tax revenues. There is a need for cooperation and coordination between countries.
Patent rights are the legal right of the owner of information about an invention to exclusively use the patent obtained through patent application and examination by the competent authority for a certain period of time. It is an important means of protecting inventors’ rights and encouraging innovation. Trade secrets, on the other hand, are production methods, sales methods, and other technical or managerial information that are useful for business activities and can be protected by law under certain conditions. For example, a specific manufacturing process or customer list may be protected as a trade secret. Both patents and trade secrets are legally protected intellectual property, and the information and communications technology (ICT) industry is built on such intellectual property.
In addition to the issue of intellectual property protection, the taxation of the income that ICT multinationals earn from intellectual property has recently become an issue. Some countries are in the process of introducing digital taxes on ICT MNEs. Digital taxes are taxes levied on the income earned by ICT MNCs in countries that have introduced them. The idea behind digital taxes is that countries are concerned about reducing corporate taxes. Corporate taxes are the most important taxes that countries collect from companies, and are levied on the profits that remain after expenses are deducted from the income earned through the sale of goods or services.
Many ICT multinationals have been criticized for avoiding corporate taxes by establishing subsidiaries in countries with significantly lower corporate tax rates and funneling profits to those subsidiaries. For example, ICT multinational company Z establishes a subsidiary in country A, which has a very low corporate tax rate, and grants it the right to use its patents. When the subsidiary in country B, which has a higher corporate tax rate than country A, generates income from the use of the patent, Z pays the subsidiary in country B a royalty, which is a fee for the use of the patent. This minimizes the amount of profit that would be subject to corporate tax on the subsidiary in country B. This avoidance strategy takes many forms and requires a national response.
Even in countries that host many headquarters of ICT multinationals, collecting corporate taxes on these companies is problematic. However, some countries are defensive about introducing digital taxes because the activities of ICT multinationals are important to their country’s leadership in the industry. This is based on a balance between economic and national strategic interests.
A more important issue for countries with leading ICT industries may be the international strengthening of ICT intellectual property protection. In theory, weaker protection of intellectual property disincentivizes the creation of useful knowledge and stagnates knowledge progress, while stronger protection of intellectual property prevents access to that knowledge, benefiting only a few. If the former is called the cost of attraction and the latter the cost of access, then the optimal level of intellectual property protection is where the sum of the two costs is minimized. Countries set their level of intellectual property protection at that level.
One study showing the relationship between patent protection and national income found that above a certain level of national income, patent protection tends to be stronger as national income increases, but countries at the lowest income levels have weaker patent protection than countries with lower incomes. This suggests that countries also differ on the optimal level of intellectual property protection. For example, some low-income countries may feel the need to relax patent protection for early industrial development, while high-income countries may seek stronger protection to further spur innovation.
In conclusion, patents and trade secrets each protect intellectual property in different ways, and they play an important role in a country’s economic development and innovation. At the same time, the introduction of new taxation regimes, such as digital taxes, has become an important topic of discussion in the global economic environment. Countries need to cooperate and coordinate to address these complex issues.
