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November 16, 2017

In our debut edition of the A&M Tax Minute (titled IP Planners May be Humming a New Tune in Light of Pending U.S. Tax Reform), we modestly predicted that a day could soon arrive where the United States might be seen as a viable intellectual property (IP) holding company jurisdiction. The premise at the time was based on the prospect of a lower corporate income tax rate (estimated between 15 percent and 20 percent at the time) and a potential zero-rated regime for the export income attributable to IP under the now defunct “Border Adjustment Tax” (BAT).

Later, with the slow death of the BAT in our wake, we more cautiously predicted that IP migrations could be “back in the game” (see IP Migration Back in the Game after BAT gets Thrown Out). This was prompted by the buzz from Capitol Hill on the movement towards a “territorial system” in which IP income earned abroad might be permanently exempt when earned through a Controlled Foreign Corporation (CFC). Our assessment proved to be accurate based on recent provisions contained in the House Bill [1] which were perfectly aligned with the Senate Plan [2] with respect to a territorial regime for 10 percent or greater foreign owned corporations. As a caveat, we subtly noted in the prior article on the possibility of a tax on “excess earnings” from foreign IP ownership. Despite our high batting average on these predictions, we were caught looking upon the release of the base erosion and high foreign return provisions from both the House Bill and Senate Plan, and perhaps more importantly, the Senate’s favorable IP provisions.

While a 20 percent corporate income tax coupled with various iterations of legislation targeting base erosion payments and high foreign returns may be encouraging enough to deter U.S. multinationals from moving IP offshore, there are key provisions in the Senate’s plan released last week that could make the U.S. look quite advantageous (like Ireland, for example) in terms of favorable IP holding company jurisdictions. This idea lies in a proposed 37.5 percent notional deduction against “foreign-derived” intangible income. Coincidentally or not, the deduction results in an effective 12.5 percent rate on income attributable to IP that results from sales and services to foreign customers which is exactly the same rate Ireland levies on “trading income.” It’s important to note the recently revised Senate proposal, which would make the 12.5 percent effective rate temporary, until 2025, at which time it goes up to 15.625 percent.

Further bolstering the motivation for companies to encourage the domestic holding of IP, the Senate Plan proposes to treat a CFC’s distribution of IP to its U.S. parent as a “dividend” only up to the adjusted tax basis of the IP. In combination with the territorial regime, this may effectively allow for tax free repatriation of IP, including patents, inventions, and know-how, from a CFC to its U.S. corporate shareholder.

It should be carefully noted that the provisions mentioned above are exclusive to the Senate Plan.  Since a formal bill and subsequent mark-up have yet to bring a bill that can be voted on to the Senate floor, it is anyone’s guess what the final form of these provisions might look like and how negotiations with the House may further change them. However, one thing is rather clear and harmonious between the House Bill and Senate Plan: the U.S. International Tax Reform Agenda is principally concerned with bringing cash, jobs, property and of course tax dollars that have previously escaped their way to Ireland, Mauritius, Malta, etc. back to the United States. To complement this objective, both plans unabashedly attack the base erosion and high returns stemming from the offshoring of IP, as well as tangible property and jobs. While the House Bill generally targets “foreign high returns,” the Senate Plan sets its aim at “global intangible low-taxed income” (GILTI).

With this in mind, we turn to our friends in the tech industry to ask: have we reached a point where it is time to consider the “on-shoring” of foreign IP?

We’d love to get your thoughts! Please call or email us and let us know!

Author: Kenneth Dettman

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[1] "Tax Cuts and Jobs Act" (H.R. 1)

[2] Senate plan, as explained by the Joint Committee on Taxation’s description of the chairman’s mark, released Nov. 9, 2017