S&ED rewind: Innovation Dialogue Results in Chinese Commitment to Review HNTE

Over the last several weeks, the United States and China through the Innovation Dialogue have engaged on a number of USCBC priority issues related to innovation and intellectual property (IP) protection – most notably High- and New-Technology Enterprise (HNTE) status. According to USCBC sources, the Chinese side committed to review and revise HNTE policies during high-level Innovation Dialogue meetings just prior to the Strategic & Economic Dialogue (S&ED), though the commitment did not formally make the S&ED fact sheet. Other topics of discussion between the two sides included service invention regulations, patent concerns related to pharmaceuticals and medical devices, strategic and emerging industries (SEIs), and technology licensing and market access issues.

MOST commits to review HNTE program in line with bilateral commitments

On the eve of the S&ED, Minister of Science and Technology Wan Gang and White House Office of Science and Technology Policy (OSTP) Director John Holdren co-hosted the fourth round of the US-China Innovation Dialogue in Washington. The government-to-government dialogue was wide-ranging, including topics related to innovation, technology, and IP protection. Its main outcome occurred after a lengthy discussion about the challenges posed by China’s HNTE program, notably its requirement that China-based entities own have a five-year global exclusive license on IP in order to qualify. Minister Wan pledged that the Ministry of Science and Technology (MOST) would review HNTE policies and revise them to ensure that they meet bilateral commitments to non-discrimination against IP, based on the location of ownership.

Discriminatory IP requirements within China’s HNTE system have been a long-standing problem for USCBC and its members. They have been included in a range of USCBC advocacy documents and efforts, including USCBC’s March 2010 report on innovation best practices, its 2013 recommendations for the Joint Commission on Commerce and Trade, and USCBC’s HNTE brief, which was provided to the US government prior to the Innovation Dialogue. In April, USCBC raised concerns about China’s HNTE program before a US and Chinese government audience during the spring meeting of the JCCT Intellectual Property Rights Working Group. In July, USCBC had flagged this as an important issue in preparatory meetings for into this year’s dialogue hosted by OSTP.

Other topics discussed include:

• The relationship between China’s administrative licensing system and company concerns about technology and IP licensing. Concerns were also raised that the high number of licensing and approval “checkpoints” create a dynamic that pushes foreign companies to provide technology and/or trade secrets to Chinese companies or to regulators.
• US and Chinese approaches to tax incentives and credits, as well as other policy tools designed to promote innovation in each country. The US side raised concerns that these policies (along the lines of HNTE) discriminate against IP based on location of ownership.
• The State Intellectual Property Office’s (SIPO) draft Regulations on Service Inventions and US concerns that these regulations may create significant administrative burdens for companies with active patent portfolios. They could also drive up compensation costs above international norms.
• A pair of regulations released by the China Food and Drug Administration (CFDA) earlier this year that permit fast-track reviews for indigenous innovation products in pharmaceuticals and medical devices.

However, based on USCBC conversations with officials, it appears that the two sides discussed but did not make progress on another of USCBC advocacy point: severing links between indigenous innovation and government procurement. As noted previously, despite China’s 2011 commitment to break existing links between indigenous innovation and government procurement preferences at the central and local levels, USCBC’s May 2013 report on the status of this commitment still shows that more than 40 percent of provinces have given no indication that they have complied with this commitment and follow-up regulation. This includes notable locations where foreign companies have investment such as Sichuan and Zhejiang provinces. Additionally, USCBC has seen signs of backsliding as new regulations linking indigenous innovation and government procurement have come out in places like Beijing, Shaanxi, and Inner Mongolia.

During the dialogue, the US was represented by OSTP; the departments of Commerce, Treasury, and State; the Office of the United States Trade Representative; the US Patent and Trademark Office; and the US Food and Drug Administration. The meeting also included representatives from two USCBC member companies: Cummins Inc. and QUALCOMM Inc. The Chinese delegation included officials from the ministries of Science & Technology, Industry and Information Technology, Finance, and Commerce; the State Intellectual Property Office; the National Development and Reform Commission; the State-Owned Assets Supervision and Administration Commission; and the China Food and Drug Administration, as well as representatives from the Chinese firm ENN Group.

The July meeting was followed by an August 1 meeting of the experts group that included academic and private sector innovation experts from both countries. Experts reviewed and discussed many of the key themes raised during the July meetings, along with areas for future joint study such as innovation clusters. This experts’ level group may represent the last major meeting for the Innovation Dialogue in 2013. However, the two sides aim to hold the 2014 senior-level meeting of the Innovation Dialogue in advance of the S&ED, just like this year. USCBC has provided the US government with feedback on topics, speakers, and the structure of innovation-related discussions, and will continue to monitor and report on the Innovation Dialogue and how innovation-related outcomes may play into the fall 2013 plenary session of the JCCT.

Background: HNTE

One of China’s core innovation tax policies, the High- and New-Technology Enterprise (HNTE) program, offers qualified companies a 15 percent tax rate (versus the standard 25 percent tax rate), regardless of the company’s investment type and where the company is headquartered. HNTE status is granted by provincial tax authorities for company facilities located within those provinces.

However, to qualify facilities for HNTE status, companies are required to own the proprietary IP rights of the core technology used in their products and services in China. Alternatively, they may give their Chinese subsidiaries a global exclusive license for that IP for at least five years. Generally, the HNTE certificate is valid for three years once it has been approved, and it can be renewed every three years.

The HNTE program has a de facto bias against foreign companies because it forces them to manage their global corporate IP structure according to Chinese industrial policy goals. Innovative companies around the world prefer to manage their IP according to commercially based considerations and international best practices.