Posted June 03, 2015 at 02:06 PM
Congressional leaders on both sides of the aisle are making progress toward a major new business-friendly tax reduction on intellectual patent profits. On March 17, 2015, the United States Senate Committee on Finance held a hearing on Building a Competitive U.S. International Tax System. Witnesses offered testimony and answered senators’ questions about the possible benefits of the U. S. establishing a “patent box” regime to allow a discounted corporate tax rate on certain intellectual property.
A patent box imposes a very low tax rate on businesses’ intellectual property income. Many European countries such as Belgium, France, Hungary, Italy, Luxembourg, the Netherlands, Portugal, and Spain have adopted this approach. The U.K., concerned about losing corporate headquarters, recently adopted a patent box regime with a 10% rate for patent-related profits, which is approximately half its overall corporate tax rate.
Patent boxes are intended to incentivize companies to keep research and the resulting intellectual property at home. American firms frequently perform research in the U.S. but choose to hold the resulting patents in tax-haven countries, avoiding the relatively high U.S. tax rate indefinitely. In addition to the lost tax revenue, there is concern that holding patents overseas may lead companies to transfer more research and high-end manufacturing jobs as well.
The Senate Finance Committee launched bipartisan working groups in January of 2015 to analyze current tax law and evaluate reform options. Senator Rob Portman (R-Ohio) and Senator Chuck Schumer (D-NY) co-chair the International Tax Working Group, which has received many comments on the patent box issue. U.S. multinational high-tech and pharmaceutical businesses want the tax reduction to allow them to compete globally.
Senator Schumer would like to see the U.S. move forward, especially now that the Organisation for Economic Co-operation and Development (OECD) has adopted a modified nexus approach, which requires companies to prove that research and development (R&D) associated with IP was performed in that country in order to benefit from the lower patent box rate. Schumer said, “We sit around talking in theory about tax reform, other G20 governments are proactively enacting new tax policies that are, to put it bluntly, stealing our tax base and forcing our U.S. multinationals to send jobs and assets overseas. It’s a wake-up call for all of us who want to keep R&D and associated manufacturing jobs in the U.S. It’s actually a very good thing for us if we can move forward.”
The Honorable Pamela F. Olson, currently U.S. Deputy Tax leader & Washington National Tax Services Leader at Price Waterhouse Coopers LLP, testified on March 17, in support of the patent box regime. She noted that the United States research credit is ranked 27th out of 41 countries in terms of the tax incentives provided for research and development activities, and that 3 of the top 4 countries have patent box regimes.
Senator Portman expressed concern about the Obama Administration’s FY 2016 Budget, which calls for a 19% minimum tax on foreign income. Olson agreed with him that while it might keep companies from relocating abroad, it will do very little to bring R&D activity back to the U.S.
Senator Schumer asked Olson whether the U.S. could incentivize companies through making the R&D credit more generous. She replied that the R&D credit serves the purpose of getting U.S. companies to locate R&D here, but it doesn’t incent R&D activity that wouldn’t otherwise have occurred. She pointed out that other countries are going after R&D on both sides. They incent R&D on the front end when the research occurs and on the back end with a lower rate on the returns on the results of the R&D efforts.
Although there is bipartisan support, reform is unlikely to be accomplished this year. Difficulties remain, such as defining what types of innovation would qualify for the tax break, offsetting the cost of a corporate rate reduction, and determining ways to satisfy firms organized as small businesses.