Is there an innovation box in your future?
Proposed legislation may encourage keeping intellectual property in the US
TAX ALERT |
On July 29, 2015, House Ways and Means Committee members Rep. Charles Boustany (R-LA) and Rep. Richard Neal (D-MA) released a bipartisan discussion draft entitled The Innovation Act of 2015 (Act). The Act calls for a patent or innovation box that would offer a 10 percent tax rate on qualifying intellectual property (IP) income. Income from a patent, invention, formula, design, pattern, know-how or any product using such properties would receive beneficial treatment. Additionally, companies would be able to include income from motion pictures, videotapes and computer software.
Under the Act, a U.S. company would calculate its taxes on IP-related income by identifying gross receipts attributable to certain technology-based IP. The company would then subtract any related costs to determine the net profit from the IP, multiply this IP by the ratio of domestic research and development (R&D) costs to total costs, and apply a 10 percent tax rate on the resulting profit (as opposed to the general 35 percent corporate rate). The discussion would also permit companies with foreign-based IP to move that IP back to the U.S. without paying any U.S. transfer taxes so that the newly domesticated IP would be eligible for the innovation box. The provision would apply to taxable years beginning after the date of enactment.
Aim of legislation
The central aim of the legislation is to give companies more incentive to keep research and innovation in the United States, particularly when it has become increasingly easy to move IP to low-tax havens. According to Boustany and Neal, the U.S. tax code is inhibiting American job creators, who are facing stiff competition in the global economy. Other countries, such as the United Kingdom and Ireland, have already enacted innovation box or patent box legislation. According to Senators Rob Portman and Chuck Schumer, who support the Act, “[w]hile other countries are using tax policies like innovation boxes to lure business and jobs to their shores, America is falling behind.” In a joint press release issued July 29, 2015, Portman and Schumer stated: “If we don’t change our tax laws, companies are going to keep pulling the rug right out from under the Unites States, taking our intellectual property and thousands of jobs rights along with it.”
According to the Organization for Economic Cooperation and Development (OECD), a patent box regime is useful in supporting growth and innovation in a country that attracts real activity. However, a patent box regime can be harmful if it merely encourages companies to shift profits from the location in which the value was actually created to another location where they may be taxed at a lower rate. (Action 5, OECD base erosion and profit shifting project). Critics argue that U.S. companies already pay a very low or even negative effective tax rate on IP-related income due to the R&D credit and other existing tax breaks. The innovation box proposal, the argument goes, would constitute additional unnecessary beneficial tax treatment of U.S. companies.
Request for feedback
Boustany and Neal have issued a request for feedback to the proposal. Specifically, they are seeking feedback with respect to the scope of the “qualified property” definition, the interplay between the proposed legislation and the R&D credit under section 41 and the domestic production activities deduction under section 199. As the innovation box proposal moves through Congress, significant changes to the proposed legislation can be anticipated before it is finalized.