Draft Legislation Proposes Favorable Treatment for Intellectual Property Transferred to the United States
On July 29, Representatives Charles Boustany, Jr. (R-La.) and Richard E. Neal (D. Mass.) introduced draft legislation to the House Ways and Means Committee that would provide favorable tax treatment on certain intellectual property as a means of encouraging U.S. companies to bring their intellectual property back into the United States. The full text is available here, and a summary of the proposal is available here.
Under current law, there is no deduction or preferential tax rule for income from intellectual property. The proposal, titled the “Innovation Promotion Act of 2015,” creates a “U.S. innovation box” for qualifying intellectual property which is repatriated to the United States where income from the qualifying intellectual property receives a discounted 10 percent tax rate, and all taxes on the intellectual property are waived until the property is sold. The proposal applies to patents, know-how, processes, inventions, formulas, designs, patterns, and computer software, and products made by these patents, processes, and designs. However, marketing, trademarks, or copyrights do not qualify as eligible intellectual property. For qualifying types of intellectual property, the “innovation box profit” — which is defined as the gross receipts minus the cost of goods and expenses multiplied by the company’s ratio of domestic research and development to costs over the past five years—is eligible for the 10 percent tax rate. These “innovation box profits” include compensation for infringement of the qualifying intellectual property rights. In addition, repatriation of appreciated intellectual property by a foreign subsidiary of a U.S. company would not be taxed. The proposal is expected to most benefit U.S. high tech and pharmaceutical companies, and has a proposed effective date of December 31, 2015.
The “discussion draft” was introduced to the House Ways and Means Committee, and the drafters hope to have a version of this proposal included in the broader international tax legislation that the Ways and Means Committee might address this fall. The Chairman of the Committee, Representative Paul Ryan (R-Wis.), has spoken favorably of the bill, but other members of the Committee have expressed concern that the draft would provide tax relief to certain industries but not others. The Ways and Means Committee is in the process of taking input regarding the proposed legislation from interested parties, and Representatives Boustany and Neal have also requested detailed feedback about specific aspects of the proposal, including what types of intellectual property should be included and whether the proposal helps U.S. companies to remain competitive in the global marketplace.