Congress can’t agree broad tax reform, but it may cook up a fiscal treat for innovators and companies to keep them in the U.S.
Fearful of businesses fleeing America’s high taxes, Republican lawmakers have dreamed up the idea of a “patent box” or “innovation box” to cut the feds’ tax take on income from intellectual property.
It is aimed at tech companies and drug makers that can easily shift operations to more business-friendly countries overseas.
The patent box is one of the ideas that Republican lawmakers are considering as the GOP lowers its ambitions from an overhaul of the entire corporate tax code to focus on a narrower rewrite of provisions relating to taxation of U.S. companies abroad.
Lawmakers such as Rep. Paul Ryan, chairman of the House Ways and Means Committee, and Sen. Rob Portman, head of a tax working group in the Senate, have hinted that a patent box might be part of a way forward, one that could mitigate the threat of U.S. companies moving their operations from the high-tax U.S. to low-corporate-tax countries.
A patent box, which refers to a box that taxpayers would check to be eligible for benefits, would tax income derived from patents held by the company at a lower rate than the overall rate. An innovation box would include a broader category of income from intellectual property.
Companies could separate out their revenue from intellectual property, for example, from drug patents or music copyrights, and pay the lower tax rate on that income.
It would be a stopgap in the larger effort to fix the incentives facing U.S. companies, which have reason to try to declare their intellectual property revenue in low-tax countries like Ireland. That is the dynamic that has led to U.S. multinationals employing complicated tax schemes to move their revenue from patents overseas, such as the “double Irish with a Dutch sandwich” arrangement used by Apple.
The patent box would render many such accounting tricks unnecessary by taxing those kinds of profits at a low rate, perhaps 10 percent or lower, instead of the current 35 percent for corporate income.
“In order to compete in a global economy where it’s so easy to move sort of capital overseas, it’s easy to relocate intangible investments and innovation — it’s just another tax strategy to keep the investment and innovation happening in the U.S.,” said Aparna Mathur, an economist at the right-leaning American Enterprise Institute think tank.
The underlying problem is that the statutory U.S. corporate tax rate, at 35 percent, is the highest among developed countries. Furthermore, the U.S., unlike most other advanced nations, taxes companies at that rate on income earned all over the world, granting credits for taxes paid to foreign governments.
The combination of those policies has led to a rash of corporate “inversions,” in which U.S. companies merge with businesses in low-tax jurisdictions and then place the headquarters of the combined companies there to lower their tax bills. The U.S. also has seen a trend of domestic companies being bought out by foreign corporations.
That development, which is expected to cost the Treasury billions in lost revenue over the next 10 years, is bad enough.
But members of Congress have expressed concern that, in the absence of a tax reform deal to lower the rate, it could get far worse, with companies moving not just their legal headquarters but also their researchers, executives, and business overseas. Such moves would entail even more lost government revenues from income and sales taxes, not to mention the economic activity that would be missed.
“A delay in adopting a competitive [intellectual property] system significantly increases the risk that IP development will shift overseas, causing the U.S. to lose significant jobs and revenue to other developed countries,” wrote Motion Picture Association of America executive vice president Joanna McIntosh in a comment letter submitted to a Senate working group focused on international taxes.
Other countries have already introduced patent boxes to get ahead of the competition. The United Kingdom has a patent box featuring a 10 percent tax rate, while Ireland is working on a similar idea. The Netherlands has a 5 percent innovation box.
“The Europeans are very generous with it,” said Evan Migdail, a partner at the law firm DLA Piper who represents corporations.
The biggest obstacle to a patent box, Migdail said, would be the need to recover tax revenue lost from offering firms lower tax rates on some income.
And there are no guarantees that it would solve the larger problem of companies angling to try to shift income into tax havens. “There’s always going to be tax planning,” Migdail said.
Even if it is put in place, both Republicans and Democrats will want to pursue tax reform that lowers rates, cuts loopholes and eases U.S. taxes on foreign income. “A patent box is like tinkering at the edges of what we really need,” Mathur said.
