On July 27th, many industry groups experienced the thrill of victory while others, the agony of defeat, when the White House and top Republican lawmakers issued a joint statement announcing that the Border Adjustment Tax (affectionately referred to as the “BAT”) would no longer be included in future Republican-based proposals on tax reform.
For many tech companies, the demise of the BAT is not about victory or defeat, but rather about its impact on tax efficiency. Currently, the U.S. tax system tends to make it highly desirable for tech companies to hold intellectual property (“IP”) rights outside the U.S. (at least to some extent). The BAT had threatened to turn that desire on its head - the results of which could have had a dramatic impact on IP planning.
The prospect of the BAT led to a noticeable pause in IP migration. Alert tech companies recognized that income attributable to IP owned in the U.S. and used abroad (e.g., in the form of royalty income or export sales) might become exempt from U.S. tax, while expenses attributable to IP owned outside the U.S. and used herein (e.g., in the form of royalty expense or import purchases) might no longer be deductible. As compared to the traditional IP holding countries, such as Ireland with its 12.5 percent rate, the U.S. might have offered an unbeatable 0 percent rate on profits from IP held within the United States. This potential all-star tax regime led many tech companies to call a time-out to reassess their game plans.
But now that the BAT is out, no singular proposed component left remaining in the Republican-led tax reform proposals (even the dramatic tax rate drop) appears likely to push the U.S. ahead of the pack in terms of IP favorable jurisdictions. Not surprisingly, in the short time since the announcement of the BAT’s demise, we have already detected an increased market interest in IP migration planning. The proposed change to a territorial tax system could dramatically increase that interest by permanently exempting U.S. taxation on offshore IP-related income. If your company has been sitting the game out, it may be time to dust off those cleats, and bring those IP migration plans back up to the plate.
Should we be expecting a 9th inning surprise in the form of an entirely different revenue raising mechanism? Perhaps. The BAT was estimated to generate over a trillion dollars in revenue. With that revenue gone, the rate reduction and immediate expensing proposals would have to be much less dramatic, or at least more temporary; making their impact on the economy much less promising. Thus, there is tremendous desire on the part of the Republicans for a revenue replacement. For more on that, see BAT-er Up: Will Tax Reform Strike Out Without the BAT? Rumor has it that perhaps a minimum tax on unrepatriated earnings or perhaps on “excess earnings” from foreign IP ownership, (both of which have been floated as possibilities for several years) could help close the revenue gap. For now, there’s no direct evidence that such taxes will be proposed, much less passed. But, again, even if these proposals do come to fruition, it seems unlikely that they would put the U.S. high on the list of IP holding company jurisdictions. Regardless of what else may come with U.S. tax reform, the demise of the BAT means that IP migration and planning will soon be back and in full swing.
Authors: Kenneth Brewer and Rebecca Lara
Spanning the globe to bring you the constant variety of tax reform... the thrill of victory... and the agony of defeat... the human drama of political competition... This is A&M's coverage of the Wide World of U.S. Tax Reform!
We’d love to get your thoughts: Has your company been holding off on IP migration? Does the demise of the BAT encourage your company to resume IP planning? Please call or aliguori [at] alvarezandmarsal.com (email us) and let us know!