In an effort to bring a more business-friendly tax climate to the United States and level the tax playing field with many foreign countries, bipartisan tax writers are supporting a significant new tax break to incentivize corporate intellectual property innovation.
While not expected to make it to law this year, the legislative negotiations over the tax break may form a foundation for future legislation and frame an election year debate over taxes and their effect on and role in economic growth.
The tax break, known as the “patent box” or “innovation box” has been already adopted in many developed countries where U.S. companies routinely compete for sales and market share. As global competition ramps up for patents, innovation and the jobs that accompany them, many U.S. high-tech and pharmaceutical companies are rallying around the tax break efforts.
The patent box imposes an ultralow tax rate on business income derived from intellectual property. The U.K. recently-adopted a patent box that has a 10% rate for patent-related profits, a rate that is almost half the country’s overall corporate rate.
By taxing patent-related profits at an ultralow rate, companies that invest in innovation and patents and have associated profits are incentivized to keep research, innovations arising from the research and the jobs associated with the resulting innovations, here in the United States rather than establishing off-shore subsidiaries or affiliate patent-holding companies in lower taxing countries.
While presently U.S. companies typically maintain research in the United States, a major concern is that the practice of moving patent ownership overseas, and the attendant loss of tax revenues, will bleed into future loss of those research jobs and corresponding manufacturing jobs to other countries.
Patent-box countries are not standing still and continue to up the competitive ante. New requirements are being enacted in these countries that tie a requirement of placing more jobs in the country as a condition of receiving the tax breaks. These countries are making a concerted effort to “lure our research,” said Sen. Charles Schumer (D., N.Y.), one of the main advocates of the patent-box idea for the U.S. “We have to protect ourselves. Whether it’s high tech, pharma or high-end manufacturing, we believe research is best kept here…. These are our crown jewels.”
Mr. Schumer is co-chairman of a working group within the Senate Finance Committee that is looking to overhaul U.S. tax rules on companies’ international operations. His GOP counterpart, Sen. Rob Portman (R., Ohio), who also supports the idea, stated “For years, the U.S. has been uncompetitive because we have the highest corporate rate in the developed world,” Now, there is another reason that the U.S. is falling behind–patent boxes,” Mr. Portman said in a statement. “By standing still, the U.S. is falling behind and it is U.S. workers and wages that suffer.”
Legislation to enact a patent box in the United Sates is fraught with both political and practical difficulties, particularly in defining what types of innovation qualify for and deserve the tax break. Some companies want a relatively narrow standard that would cover income derived from patents and manufacturing know-how, for example, while others want a broader standard that could cover income attributable to marketing materials. Still, many advocates of the patent box legislation are hopeful that progress toward enacting patent box legislation this year.
The attorneys at Rosenbaum IP, P.C. will be watching the progress of this legislative effort as it winds through Congress and provide updates as further information on this important initiative becomes available.