US Congress considers domestic patent box regime - should you reevaluate your global structure?
05 October 15
Intellectual property ('IP') box regimes typically apply reduced tax rates to income from intellectual property as an incentive to locate IP-related work in a jurisdiction. Recently unveiled draft legislation may pave the way for a US IP box regime and incentivize taxpayers to reevaluate their global structures.
The US imposes the highest corporate income tax rate (35%) in the developed world and the third highest rate among all countries, surpassed only by Chad and the United Arab Emirates. The potential rate differential gives US companies an incentive to locate business operations in jurisdictions with more attractive tax rates, particularly if the activities are geographically mobile. Of course, companies also require a local workforce with the necessary education and expertise, a reliable legal and tax system, political stability and appropriate infrastructure.
US Patent Box Regime – Will Locating IP Outside the US No Longer Be Necessary?
While IP box regimes are more common in Europe, the US has yet to implement its own version. With US corporate tax competitiveness at an all-time low, members of the House Ways and Means Committee recently unveiled the Innovation Promotion Act of 2015 (the "Act"). If enacted, the Act could incentivize US companies to keep their IP in the US and non-US companies to base their IP and IP-related activities in the US.
Considerations Going Forward
The Act's objective clearly is to reward R&D expenditures. A company's IP R&D and total operational costs are aggregated over a 5-year period for purposes of computing its allowable deduction. Although the Act would be effective as of the date of passage, IP R&D costs incurred in prior periods would factor into the computation of a company's allowable deduction. Therefore, existing structures should be reconsidered now because some companies may benefit from early-stage planning designed to maximize benefits available under the Act once it is enacted into law.
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