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Economics References Committee - 27/07/2015 - Australia's innovation system

MULLER, Mr Mark, Director of Finance, Cook Medical Australia

[15:08]

CHAIR: I now welcome Mr Mark Muller from Cook Medical Australia. Thank you for appearing today. Would you like to make an opening statement?

Mr Muller : I would. First of all, it is a pleasure to be here. I think it is one of the topics that is foremost in a lot of people's minds in Australia. There is no doubt at all that Australia has a very proud heritage of innovation, and the history of developments that have been made in the past in this country is absolutely staggering. Even in our industry—and I am in the medical device industry at the moment—there has been the world's first plastic hypodermic syringe, injectable penicillin, ultrasound machines and long-term contact lenses. The real shame that we have is that, when you talk about some of those products, people do not think they were actually developed in Australia, but they were. The INSEAD global innovation index—and INSEAD is an international business school that puts together these statistics on a regular basis—ranks Australia 13th in the world for coming up with the ideas but has ranked us only 107th in the world for taking those ideas and actually making them into a commercial product. That is a 2012 statistic. So we have great ideas, but we have a very poor record at the moment for commercialising those products. This should not be a great surprise because for many years we have actually treated manufacturing and those involved in manufacturing almost as second-class citizens. We want to be a smart country. There is a lot of smart manufacturing around. But the visions that have been portrayed over a number of years of manufacturers—the old, dirty manufacturing floor—have meant a lot of people have been corrupted in their views by the propping up of the car industry. That is definitely not indicative of what all Australia has to offer in manufacturing.

Manufacturers account for a huge proportion of Australia's R&D and by their very nature having to generate profits and an even greater proportion of the R&D that is successfully commercialised. Without manufacturing, how do you make prototypes, test products and enhanced products from the lab to the actual commercial product? It is very rare for a product to be developed. What actually gets to the consumer is actually what was developed in that sterile R&D environment.

R&D and innovation really has three stages. The three stages are: the development of the product, the processes to actually manufacture the product and the enhancements that occur over a period of time to both the product and the processes. You often see that as version 1, version 2 and version 3 of the end product. Common sense says that if you do not have manufacturing, you are already missing out on two-thirds of the potential for R&D and innovation because without the manufacturing you cannot do the process R&D and the iterative product.

To put it in perspective with manufacturing—there is a lot of talk about manufacturing and how it is declining, which it is at the moment, unfortunately, in Australia. But manufacturing in Australia still accounts for 8.4 per cent of the workforce. It is currently the fourth largest employer in Australia. It is down from being the second largest employer 10 years ago. The two that have overtaken it, believe it or not, are health care and social assistance. It still accounts for about 11 per cent of all export income and that has actually been growing rapidly in the last six months as mining has come off the boil.

Even with the decline over the last 10 years of Australian manufacturing, it has still been growing every year—the income from manufacturing exports. It represents 8.3 per cent of GDP. Twenty per cent of people involved in manufacturing export some product, which is a fairly high proportion in any industry. Here is a surprising thing: in the 2012 Bureau of Statistics information, 25 per cent of all R&D conducted in Australia is actually conducted by manufacturing. So this little animal that sits over the side that accounts for 8.3 per cent of GDP still accounts for 25 per cent of all R&D in Australia. That is down from 35 per cent in 2005. Of course, that sort of information is supporting the Prime Minister's manufacturing task force reports and there have been a number of different reports there.

There is no doubt that over time industries rise and fall and we are certainly not saying that all industries and manufacturing or elsewhere should actually be protected. They will fall by the wayside due to their products or their inability or their lack of desire to either innovate or change. Manufacturers, like most businesses nowadays, actually operate in a global environment. None of us can control the labour rates that are present in China, Vietnam and India, and places like that. And we also have to content with things like exchange rates—and exchange rates are difficult when the Australian dollar moves as much as it does. When companies see their entire margin disappear over a six-month period, it is difficult. What we are starting to see more in the global market is that our competition is coming from companies that are actually positioning themselves in what we will call the more westernised countries—those that have a better incentive scheme for manufacturers in those countries.

In 1986, Australia introduced the R&D tax credit. When it was brought out, it was very good, and it has been around ever since. It has gone through a number of iterations, and it is still a great tool to have in your armoury to actually go out and do innovation and R&D. But that is now no longer something that is unique. The R&D tax incentive is now in place in 34 different countries around the world in some version or another. What has happened in a number of countries now is they have actually replaced the 'old concept', and I will use that term, of an R&D tax incentive with a pool of incentives.

That pool of incentives is basically the R&D tax incentive in some form, coupled with what we loosely call a patent box—and I know that that has been in the news for a while now. Currently there are 10 countries in the world, nine in Europe and China, that have a patent box. Right now the US is looking to implement a patent box and is likely to have it in place within 18 months.

In simple terms, in our submission—and I have a further document that I will submit at the end—we are basically promoting that innovative manufacturers in Australia would like to have a level playing field and be able to partake of the same sorts of incentives that are available largely around the world. In simple terms we were looking at the UK model. The UK model says that if you develop a profit stream from product that was researched in that country then the profit stream that you get from those products is taxed at 10 per cent, not the underlying rate of 21 per cent. We are not hung up on the 10 per cent. People talk to us about what rate you want—that is not for us; that is for other people to talk about. Whether it is 10 per cent, 15 per cent or 18 per cent, that is up in the air.

The UK model was only introduced in 2013, and obviously they had spoken about it for a number of years. A very good indication of the success that it brought to the UK is that, within the first week of its being announced in the UK, GlaxoSmithKline, which was a very big manufacturer in Australia, announced that it was going to spend $500 million building two new plants in the UK, which they have started to do, and they then closed three plants in Australia. So the manufacturing from Australia in that instance is going to the UK. To quote their chief executive, Sir Andrew Witty:

The introduction of the patent box has transformed the way in which we view the UK as a location for new investments.

A lot of companies have moved to the UK. In fact there are more pharmaceutical companies now with their headquarters in the UK than there are in America.

The patent box that the UK brought out was so successful that it kind of upset the Germans. I do not know whether you followed what happened at the G20 meeting in Brisbane. The Germans and the UK had a bit of a stoush with each other. But the reality was that the only point they altered was that the previous UK model said that the research need not have been conducted in the UK—that the research could have been purchased by a UK based company and they could still get that tax benefit. The change to the law that has happened and is now generally accepted as the rules around the patent box is that as long as the R&D is conducted in that country then the company will enjoy the benefits of the reduced tax rate on the income that they produce on those products in that country. That makes the whole scenario a lot worse. With the changes that have happened now, where previously you could have had a multinational company who decided that they would, say, conduct their research in Australia on a new product and then transfer it to a plant in the UK to manufacture and derive the profits, that is no longer going to happen. With a lot of companies—you obviously invent a product to make a profit stream and you would like to get that profit stream for a number of years. I do not think there would be many companies that would put at risk the tax benefit of the profit stream for 15 or 20 years just to get the R&D tax incentive up front in a different country. So there is a real sting in the tail of those changes that were made. They are coming into force in 2017.

As well as our submission we have put in a separate paper. We basically had a document that has been floating around—and I know that some people have actually seen it before—in different versions for the last two years. This has been mailed to a lot of people. Basically this sums it all up. It is supported by the Export Council of Australia, AusBiotech, MTAA and Deloitte. Just before the previous round of submissions on tax changes in Australia I also travelled down and met with Advanced Manufacturing Australia. They are taking it on board, and I know that their submissions and so on, and a number of other submissions, are loosely tailored around this submission here.

The AIM scheme, which is what we are calling this, which is basically the patent box, does not endorse the traditional handouts that have happened in industries in the past and have probably tainted many people's views of manufacturing in Australia. It talks about a hand up. As manufacturers, we have to compete in the global market, and we would like to ask, on behalf of all innovative Australian manufacturers, to just have a level playing field. We are not asking for any more than what is currently on offer in many countries around the world right now. I spend one week in four overseas. I would say that I would get at least 10 or 12 requests a year to shift our manufacturing from Australia to different places around the world. In every one of them, they are offering lots of incentives. But I and the management at Cook are very parochial Australians and we all worry about the jobs our children and grandchildren will have if we continue the trend that has happened in the past.

This process is not for handouts but a hand up. It is a reduced tax rate applying to qualifying income using the simple example that 10 per cent of something is better than 10 per cent of nothing—that is just using the UK tax rate as an example. Once again, whether it is 10 per cent or a different rate is immaterial at this stage. Rather than the federal and state governments pumping more cash into the R&D sector, they should allow the manufacturing industry, a industry that has a long history of innovation and commercialisation, to compete from Australia's shores. I am also on the board of Research Australia and I sit with AusBiotech. I see all the applications that come in, often from universities and all sorts of places, for funding. I also see what has happened in manufacturing for the last X years. I have been involved with manufacturing in Australia for 36 years and I can clearly tell you that the success rate of innovation to get an end product is a hell of a lot higher out of manufacturing than it is out of the institutions in Australia. That is not to say you should not have some blue-sky research. There is always going to be something that is not at the forefront of manufacturing and where someone else needs to give a little incentive to those people to take care of it.

Giving this boost to Australian manufacturing would allow us to be globally competitive and play in the field that will encourage the manufacturers to seek out talent. Let me assure you: we do not lack talent in this country. The education institutions in this country are doing a fantastic job right now. We have a group which we call the AiN Group, who run around Australia looking for ideas for new products, which we like to commercialise. We also do a lot of work with universities and other research institutions, not only to seek out that new talent but to align ourselves with the universities to conduct research. We would like to have a system in Australia that stops us just writing about products and ideas and lets us start putting those products out into the market and in front of consumers and lets us also start exporting them.

Manufacturing brings a lot of other benefits to the Australian economy because it offers a much more diverse economy. It gives job variety. Not everyone wants to be a scientist or an engineer. There are still a lot of people out there who would like to be fitters and turners and things like that. It also gives a great opportunity for a geographically dispersed workforce. Manufacturing can occur in a lot of places in Australia. There is a huge opportunity for export income.

In summary, innovation and manufacturing are linked; you cannot separate the two. Manufacturing allows for all aspects of R&D, and not just the R&D that occurs around the product but also the processes and the iterative development of product and processes. Manufacturers have a vested interest in getting a product in front of the consumer, not just writing about it. That does not mean we should step away from the fact that we need a system that encourages businesses to approach researchers and to utilise the universities and the facilities that they have. As I said earlier, they are absolutely our world-class.

We have just put in our first 3-D printer, and it is amazing what is available in Australia to help develop the products. Within two months of having it on board, we are making prototypes thanks to the help that is available in the institutions in Australia right now.

We need to change the system somewhere along the way to reward the researchers for products, not papers produced. But we have to understand that not all research is successful, and measuring the success of a university's or an individual's research when some of it is particularly blue-sky is very difficult. The real trick for us now is not to leave it too long. I genuinely worry for Australia right now if America brings out a patent box. There are not a lot of manufacturers—bigger companies in Australia—who do not have a link to either the US or Europe. If the US brings out a patent box and says, 'All the research has to be done at home here', we are really limiting ourselves to actually selling research from here literally to Asia, which is not good in the long run.

CHAIR: Thank you, Mr Muller. You have placed a great emphasis on the patent box. My experience in working in this area is that international firms, in particular, will look at a range of factors operating within any particular country, because their real competition is not between firms; it is within firms. For instance, when Toyota talked to me about investment, they looked to what else was happening within the Toyota world. GSK and CSL—an Australian company—did the same. It is the same process. It is the business case that they look to. The question of what co-investments—I call them co-investments and you call them handouts—are offered by countries around this is a really critical factor.

In each of the cases that I have mentioned to you, the question of the R&D incentives was only a small part. It is equally true that now, particularly in recent times with recent changes, our R&D regime is actually inferior to other regimes, particularly those in northern Asia and Europe. But there are still other things that are done. Is it your assessment that it is just the R&D as a concession, or is it the full range of issues that are available?

Mr Muller : It is the full range that is available. We are part of a multinational company ourselves. For us to conduct R&D right now, if we actually had a plant that was in the UK, then we would seriously look at whether we would conduct the research in Australia or do it straightaway in the UK. Make no bones about it: the products that we manufacture are high-end medical devices. We have an inherent preference for certain countries of manufacture. Certainly the UK is one of them and the US is another.

CHAIR: And that is the quality assurance regime?

Mr Muller : Yes, that is the quality—

CHAIR: IP?

Mr Muller : No, IP does not—

CHAIR: No longer an issue for you?

Mr Muller : No longer an issue.

CHAIR: I see. What about labour?

Mr Muller : We tend to be able to counter a lot of the things with labour rates. By the way, I have been involved with manufacturing for 36 years in a number of industries—

CHAIR: Yes, you mentioned that.

Mr Muller : When you get to the labour rates of China, Vietnam and what have you, they tend to be less efficient in their application of labour—a lot less efficient, quite frankly. Also, you have the opportunity to automate a lot. So, for a lot of businesses around the world, their inputs are globally priced. That is only part of the story. We cannot control that. There are certain elements of the story you cannot control, and there are certain elements that are controllable. What we are looking at and talking about here is something that is definitely controllable by someone, which is creating that level playing field.

CHAIR: I want to come to the patent box in a minute. I just want to follow this line of argument through. You are in a highly capital-intensive industry?

Mr Muller : No, it is actually labour-intensive.

CHAIR: Is it?

Mr Muller : Yes.

CHAIR: What is your labour cost as a share of the cost of production?

Mr Muller : Our labour cost averages about $50 an hour here.

CHAIR: What is it as a percentage of your production?

Mr Muller : As a percentage of the products that we manufacture in the plant here, it varies. We have some products where it is maybe only 10 per cent or 12 per cent. But at the high end—for example, the stents that we manufacture, which account for about 50 per cent to 55 per cent of our output—the labour would be about 40 per cent of the—

CHAIR: That is high. But, often in manufacturing, labour costs are actually much lower than is argued.

Mr Muller : Absolutely.

CHAIR: The 12 per cent figure that you mention is more common.

Mr Muller : Yes.

CHAIR: So the real competition is really around capital: access to funding and the price of capital itself.

Mr Muller : Your comment about labour being lower is exactly right. The fact that the labour rates are different in China versus Australia kind of fades out a little bit. Price of capital around the world? Yes, Australia is probably still dearer.

CHAIR: But it is not a huge difference.

Mr Muller : It is not a huge one.

CHAIR: What I am saying is that globally competitive elements come into that—interest rates and various other things, the exchange rate certainly. We have not just had a high-value dollar throughout most of the last period, but it has also been very volatile.

Mr Muller : Yes, the volatility is more of an issue.

CHAIR: For instance, you mentioned automotive; automotive manufacturing in this country can make money exporting with the dollar at 86c. It cannot with the dollar above that. Certainly now it could make quite a lot of money by comparison. Those things are quite fluctuating. I am just wondering what other factors affect the investment decision.

Mr Muller : For us?

CHAIR: For international manufacturers to invest in this country.

Mr Muller : For international manufacturers to invest here, the volatility of the exchange rate would probably be No. 1. I do not see the labour rate as being a great issue. I see a little bit on the regulatory side. Australia tends to enforce our regulatory rules a little bit more than some other countries.

CHAIR: What areas of regulation?

Mr Muller : We are involved with the TGA and the medical side of it. They are more stringent, but they are changing at the moment.

CHAIR: But it is a quality assurance issue?

Mr Muller : No. What you have got is that you can actually have a product that is approved in Europe—and the quality standard over there is exactly the same as the quality standard here, but you can actually have a European-based company—

CHAIR: It takes longer here?

Mr Muller : Yes, they will take longer to approve an Australian manufacturer than a European manufacturer. But that is changing at the moment. Moving forward, for international businesses the stability of the tax regimes in the countries is going to be more and more important.

CHAIR: Do you think the tax rates in this country are higher or lower?

Mr Muller : Absolutely.

CHAIR: They are higher?

Mr Muller : Absolutely. If you take the UK model as the example, the UK have moved their tax rate from 28 to 21 per cent over the last five years—that is their company tax rate—and they are now offering this incentive as well. There are a few countries around the world that are a little bit higher by the time you put state taxes as well as federal taxes on, but Australia is right at the top end. Australia is one of the few that have not genuinely moved down, in terms of the company tax rate.

CHAIR: So exchange rate is a significant factor, and you say taxation is a secondary factor. What other matters would you point to?

Mr Muller : I would say that those two are the main factors.

CHAIR: There is also investment attraction in other countries.

Mr Muller : The biggest attraction you can actually get to Australian businesses—remember I sit on Research Australia, where they constantly talk about start-up companies and trying to get investment into those. The biggest attraction you can get to having foreigners or locals invest in Australian businesses is to show the support that the Australian business gets and show the success stories that you have got in your own country. We do not tend to treat particularly our innovative companies as well as other countries do. I can go to Singapore, the UK, the US or China and get this whole list of things that those countries will offer, and you cannot do that in Australia.

CHAIR: Could you give the committee some illustration of the sorts of things that you mean?

Mr Muller : Right now, if I go to Singapore—and we are about to set up a regional warehouse in Singapore—the Singapore government's Economic Development Board appoint a person to talk to us. We went and had a discussion with them. They actually go and short-list the sites for us and they give us a package of all of the rules that we have got to operate within. We have not entered into discussions with them, but they want to have a discussion about what tax rate we would actually like to pay.

CHAIR: That is good.

Mr Muller : I am not saying that we should actually get down to that level, but certainly in the UK—we actually had someone come here from the UK last year and try to tell us to shift our manufacturing to—

CHAIR: Are the Singaporeans still offering housing concessions and school concessions for executives and that sort of thing?

Mr Muller : We did not get into that.

CHAIR: Things are slipping! My point is that the Singaporeans go to some lengths to invest in investment attraction, and that is the use of public moneys.

Mr Muller : Sure, but the problem we have got right now is that you have always had these standout places like Singapore and Ireland—there have been a few that have actually been sitting out there and have been offering some things. The difference now is that you have a trend where the offering is more towards the patent box.

CHAIR: Let's deal with the patent box. A patent box model is particularly favourable for larger firms.

Mr Muller : No; it is favourable for all innovative manufacturers.

CHAIR: Why do you say that?

Mr Muller : Because it offers a level playing field.

CHAIR: Is there a cost for registration?

Mr Muller : No.

CHAIR: None?

Mr Muller : No.

CHAIR: There is not? That surprises me.

Mr Muller : You are talking about the UK model?

CHAIR: Yes.

Mr Muller : What they did in the UK was they had a period of grace where people could incorporate, because it was not available to individuals; it was only available to businesses. They put the rules out first and said that, as long as you were a business and you did innovation and you got your income stream coming in, then, whether you were a little two-man shop making something out of your back shed or a multinational, the rules were exactly the same.

CHAIR: You are saying there are no costs associated with registration?

Mr Muller : No.

CHAIR: What about maintaining the patents themselves?

Mr Muller : Obviously, you have to have a patent. You actually have to have patented something to prove that you have a product that qualifies.

CHAIR: Do you think larger firms are advantaged by that, or smaller firms?

Mr Muller : I think it is even. The real trick—and, by the way, we have spoken to some patent attorneys in Australia about this—is that a lot of small firms do not necessarily know that they have an idea that is patentable and that they actually have some IP. That is a different kettle of fish.

CHAIR: But GSK has made a fair bit of money out of this. That is the one that is given most attention. It certainly stopped GSK moving offshore, given that the real benefit is through the IP.

Mr Muller : Sorry; is there—

CHAIR: Is there any prohibition on GSK, for instance, if they choose to move their operations offshore from England if, say, someone offers them a better deal? Is it the registration issue or the question of the benefit around IP itself?

Mr Muller : It was the registration. It was where the company that actually owned it, but, after the stoush that Germany had with the UK, in 2017 the rules will change, so it is actually—

CHAIR: When?

Mr Muller : 2017.

CHAIR: So it is going to change?

Mr Muller : Yes, it is changing. What is going to happen is that, from 2017, you have to have done the majority of the R&D in that country to get the benefit of manufacturing in that country.

CHAIR: How is that determined?

Mr Muller : An interesting point. I will be frank and say I am not absolutely sure, because you have a lot of products that have multiple patents applying to them. You have to at least prove that you did a lot of R&D in the country. Remember they already have the R&D tax incentive. Through the R&D tax incentive itself, you already have these papers that say you are doing—

CHAIR: But, see, that is the registration process.

Mr Muller : Sorry?

CHAIR: You have to be registered to do that. This is my original point. To get access to the R&D concession arrangements, even in the United Kingdom, surely you have to register.

Mr Muller : You fill in a form to get the tax benefit. It is the same as Australia. You can actually—

CHAIR: We have about 12,000 firms registered, haven't we?

Mr Muller : In?

CHAIR: For the R&D tax concession.

Mr Muller : I have no idea.

CHAIR: It is only about 12,000, from memory. But they are required to register. Is it the same arrangement—

Mr Muller : No, you do not.

CHAIR: You have to register to get access.

Mr Muller : No; you actually do a submission. When you fill in your tax return, you fill in separate paperwork to say you get the R&D tax concession.

CHAIR: Okay. What is the cost to the British government for the patent box? What do you think that is?

Mr Muller : What is actually out there is subjective, because they brought it in in a phased scheme. The talk is, of course, that the tax rate was going go down to 10 per cent, but they did not bring out the 10 per cent immediately—it is actually coming in over a few years, in phases. But they have not really put out any papers at this stage saying what the net benefit is to the economy.

CHAIR: So how do we know that is such a good thing if there is no evidence?

Mr Muller : The only evidence that you have really got right now is that a lot of companies that have gone there. They have got the evidence to say that a lot of manufacturing is actually being set up in their country.

CHAIR: And you say that has been transferred from other countries?

Mr Muller : Absolutely.

CHAIR: But you are not aware of any evidence to sustain that; that there has been an economic benefit other than the examples you have of firms moving? Is that the case you are putting?

Mr Muller : Yes. Both sides of politics over there have spoken about it for a number of years, and they put together some modelling which showed that they would benefit. What has actually come out? Remember it is less than two years since it started.

CHAIR: It is a highly controversial measure though, isn't it, Mr Muller?

Mr Muller : Let me put it to you this way: the choice they had was to do nothing, which meant they would have lost more manufacturing. So that is the other side of it.

CHAIR: But would you concede that it is still controversial?

Mr Muller : I would say it is more that it is inevitable—it is just who gets in first. But it is actually the way the world is heading.

CHAIR: Okay, obviously, we are going to have a serious look at this and we are having a range of opinions put to us on that question.

Senator CANAVAN: I want to continue along the line of questioning with the patent box. I am interested in some of the design features in the UK. In terms of determining what the income is from the IP, how do they do that? Do you need to establish a separate business unit that houses the IP and sells it back to your own firm? Of course, selling it to other firms would be easier, because it would be an arm's-length arrangement. How do you determine the income stream when you are developing a product, some component of which is innovative? You presumably cannot claim the whole income for that product. How do you separate out what is the IP-relevant income?

Mr Muller : The starting point is that they recognise that you do not have to have done 100 per cent of the R&D on the product for it to actually qualify. If more than 50 per cent of the R&D on that product was actually done in that country, it qualifies. No, it does not have to go into a separate company; it can actually be in that company. How they are actually going to enforce it, I have no idea. Obviously, they are going through that. But as far as actually producing your income stream and separating it into something that you hold the patents for and developed yourself, it depends on the individual industry. If you talk about us in particular, it is very simple. We do research on all the stents that we do, but we do not do research on the needles. Businesses' sales reports are divided into categories. What becomes more subjective is how you actually allocate cost to those later to come up the pipeline.

Senator CANAVAN: That is what I was going to ask next. Are there the same sort of transfer pricing issues that we have with other international tax problems?

Mr Muller : Could be.

Senator CANAVAN: Because there are not necessarily arm's-length arrangements. If this is happening internal to a company, there would be some conjecture from a tax accounting perspective in how you actually pay.

Mr Muller : Absolutely—I am not saying that this is cut and dry.

Senator CANAVAN: You would have to have rules around that and how to allocate those costs?

Mr Muller : Yes.

Senator CANAVAN: It is something that we will have to follow up. You mentioned the 'qualifying IP' would be allowed to go into the patent box. What you mean by qualifying—or what does the UK mean?

Mr Muller : The qualifying IP now—if we jump forward to 2017, because in the past the UK could buy any IP from anywhere—is that you actually have to have done the research in the UK. It is very simple.

Senator CANAVAN: It is not restricted on a sectoral basis or has to be of a certain innovativeness in some respects? I suppose my question is more around the integrity of the patent system itself, which has come under some scrutiny recently—particularly in the software industry. So this is eligible in the UK for software innovation as well?

Mr Muller : Yes.

Senator CANAVAN: And is your proposal just for advanced manufacturing, then, given your representation?

Mr Muller : No.

Senator CANAVAN: You are proposing it for the entire economy, including software.

Mr Muller : I think it would be far better for the Australian economy to offer a lesser tax incentive to a wider base than to try and pick a winner group and offer a bigger tax incentive.

Senator CANAVAN: I am not sure I should push out my own views here, but there have been a variety of views around patents recently. Do you think our patent system has the integrity to withstand a tax arrangement like this, which cannot be gained by businesses establishing patents which really have no impact and that do not have any innovation underlined other than just the creation of the patent for the patent's purpose?

Mr Muller : I will be honest and say I am the wrong person to ask that question of.

Senator CANAVAN: Fair enough.

CHAIR: There is clearly a concern for this committee as to whether or not—

Mr Muller : Where you draw the line sometimes—

CHAIR: Yes—is this a ridgy-didge arrangement?

Mr Muller : If you think back, in 1986, someone had the nous to put in place the R&D tax incentive. To my knowledge, Australia was the first country to put it in place. Someone had to sit down and have exactly the same debate you are having right now: what qualifies as R&D, what does this? I have to tell you, for 20 years it helped Australia. You beauty! It stood out and helped us with our manufacturing.

CHAIR: Mr Muller, there were a whole lot of other things as well. This was the Button program. There was a whole lot of industry support that was there.

Mr Muller : Absolutely.

CHAIR: It is part of a broader philosophical question about to what extent you intervene in market relationships. There is a bit of a debate going on in this country about what is business welfare and what is what I call 'co-investment.' It is all part of a broader conversation.

Senator CANAVAN: Within your own company, obviously—and Senator Carr was mentioning this earlier—you compete for capital because you are a US based company, aren't you?

Mr Muller : Yes.

Senator CANAVAN: So you compete for capital. Do you think the addition of a patent box here would help you? Would you get more capital?

Mr Muller : Yes. We are pretty fortunate in the business we are in if you think about it. The patent box really means that when you get to the bottom line after tax you would actually have more money available. For having more money available, all you do is pay a dividend to people or the owners who want to take it out of the business. Then the franking credits system would step in over it and tax it back. So you have a choice with that extra money. You can still do that, which means that, if it is paid out, franking credits step in—

Senator CANAVAN: But your overseas owners would not get franking credits.

Mr Muller : We do not. We would actually turn around and take that money and reinvest it straight back in.

Senator CANAVAN: Can I ask you about that corporate tax rate you mentioned. You are wholly overseas owned—is that right?

Mr Muller : Yes.

Senator CANAVAN: So none of your owners would receive any benefit from our franked corporate tax system. That is why we have a high corporate tax rate. Many other countries do not have the franking associated with our system. Is it your view that that high rate with no benefit from franking really does hold us back internationally, in terms of tracking overseas capital?

Mr Muller : It is. We work in a world environment. We actually have to make products that compete in a world environment. We have to have prices that compete in a world environment. The simple thing is: is the playing field from which we are operating a world-competitive environment? And the answer is: it is not.

Senator CANAVAN: You mentioned we should have a low rate and not pick winners. Wouldn't that argument not also potentially indicate that we should just have a low corporate tax rate and not try to pick innovation as the winner, because of the issue just raised about the high corporate tax rate effects on farming businesses and tourism operations—they do not need to be innovative, per se, to have this issue. So wouldn't we just try to bring the corporate tax rate rather than come up with a specific patent box?

Mr Muller : That would be great, but a lot of countries around the world now are actually trying to stimulate and look for that innovation area, because the innovation area is, hopefully, what is going to drive new products and things going forward for the next 20, 30 or 40 years. They are specifically offering incentives into that same innovation area, the same as Australia is looking to do. We are here talking about it. But there is no doubt at all that if you just had a lower tax rate it could also provide similar sorts of benefits.

Senator CANAVAN: You touched on the TGA and I wanted to ask you about our processes specifically in terms of medical products. My understanding is that in Europe they do not have government based accreditation.

Mr Muller : No. That is right.

Senator CANAVAN: Can you explain the differences between Europe and Australia? Their system may be more conducive to—

Mr Muller : In Europe and Australia the systems are very much the same as to the quality you have to get to, the clinical trials and the evidence that you have to put there to support it. But in Europe there are a couple of independent bodies that are accredited by the government or governments and manufacturers can go to those bodies. You can pick which one you like or want to deal with and you go to them and you submit exactly the same evidence you would in Australia. But they tend to do it quickly.

Senator CANAVAN: Are they just more responsive because you are their client?

Mr Muller : It could very well be that.

Senator CANAVAN: You do not see any difference in quality assurance, safety and all of that?

Mr Muller : No, it is literally exactly the same. I would not like to dwell on the TGA right now, because the TGA here actually put in its own submissions. Part of the submission that has been put in right now—which I think is getting airplay—is that if you have the product approved in Europe they will automatically accept it here. The standards are exactly the same.

Senator CANAVAN: So you would love to have that system of mutual recognition and—

Mr Muller : Absolutely. As an Australian manufacturer, we can make a new product, send it to the UK to get approved and send it to Australia to get approved. We can get it approved in the UK and start selling it there but, because it is not actually approved in Australia, you cannot sell it in countries like China, Thailand or Taiwan. They say, 'If your own country of manufacture will not approve it, you cannot sell it.' Historically, it has been taking up to a year extra to get it approved in Australia.

Senator CANAVAN: But if you had actually made the product in the UK and had it approved in the UK you could then sell it to China, Thailand et cetera?

Mr Muller : Absolutely.

CHAIR: Mr Muller, you said that you wanted to submit some further material.

Mr Muller : This is just a copy of the document that we and AusBiotech, Export Accountants of Australia et cetera have jointly submitted. I have 12 copies. I am not sure how many you would like.

CHAIR: That is very nice of you. I am sure the secretary would be most happy to take a couple of them back to Canberra. Thank you very much for your appearance here today.

Mr Muller : Thank you very much for your time. It was a pleasure to have the opportunity to talk to you.

CHAIR: Thank you very much indeed.

Committee adjourned at 15:52