In a seemingly reluctant nod to increasing pressure from other more pro-business tax regimes, the U.S. recently introduced a proposal for legislative change in the form of an innovation (intellectual property) box regime. Similar regimes have been around for a number of years in many other countries.
Anyone following U.S. tax reform proposals in the past, knows that other reform measures have been floated only to be scuttled in the polarized political environment. Pressure is building, however. The U.S. now has one of the highest marginal corporate tax rates, with the gap continuing to widen, particularly given the U.K.’s move this summer to drop their rate even further and thus creating a 17 point tax rate arbitrage. U.S. companies continue to pursue corporate expatriations and IP migration strategies have become a staple in the international tax practioner’s tax planning toolkit. Moreover, and as importantly, the OECD’s proactive BEPS (Base Erosion and Profit Shifting) initiatives are putting Uncle Sam, once the proud innovator of tax rules (think transfer pricing) back on his heels.
The bipartisan discussion draft legislative proposal introduced on July 29, 2015 by House Ways and Means Committee members Charles Boustany, R-LA., and Richard Neal, D-Mass., calls for an innovation box regime that would provide for lower tax rates on income generated from patents and certain other types of intellectual property. While an innovation box could result in a substantial revenue loss relative to current law, it would bring the U.S. tax system more in line with similar regimes of other developed countries. Some have suggested the anticipated revenue loss, which might otherwise signal the demise of the proposal, could be offset by a tax on the deemed repatriation of offshore earnings from US controlled foreign corporations, which is already in active discussion by members of Congress.
Perhaps the most important innovation should come in the form of comprehensive tax reform – but until the political climate thaws, an innovation box regime designed to encourage U.S. businesses to retain their intellectual property on-shore is more likely and more consistent with the incremental historical development of U.S. tax policy.