IP Planners May be Humming a New Tune in Light of Pending U.S. Tax Reform
My IP Lies over the Ocean
My IP Lies over the Sea
Oh, bring back my IP to me…
A discussion regarding offshoring intellectual property (IP), either through a true migration or a cost sharing agreement (CSA), has found its way into the boardrooms of virtually every U.S. based tech company over the past two decades. This strategy has often been perceived as low hanging fruit on the proverbial “tax planning” tree. Notwithstanding, through the BEPS initiatives, the OECD has aggressively set its sights on slowing IP migrations, particularly when shifting IP to low tax jurisdictions where little or no substance has been established. Now, with major tax reform on the horizon in the United States, what does this mean for companies that hold valuable IP abroad? Will some benefits remain? Might we be penalized? Is it time to consider a major change in strategy?
The tax reform proposals from President Trump and the House Republicans both indicate a number of relevant changes that may leave companies holding IP offshore scratching their heads, including the following:
- Significantly lower U.S. income tax rates – With a potential rate decrease down to 15% or 20%, the U.S may offer rates competitive with many “formerly” attractive IP holding jurisdictions
- A border adjustment for exports – If export revenues will be tax exempt, then wouldn’t that make my U.S. tax rate 0% (not 15% or 20%) on IP held in the U.S. for use abroad?
- A border adjustment for imports – If no deduction (or other form of cost recovery) will be permitted for the cost of IP held outside the U.S., will I be penalized if I hold any U.S. IP rights offshore. And, do I need to bring my worldwide IP rights back to the U.S. now, before the effective date of the import border adjustment, in order to obtain a stepped-up tax basis and preserve a U.S. tax benefit for the value of my IP? Also, am I better off having any IP services (e.g. R&D) performed back here in the U.S.?
With these potential changes and many more on the horizon, now is the time to discuss the implications of proposed tax reform measures with your tax advisors. If your company is currently in the midst of IP migration planning or execution, it may be prudent to put a pause on that process. And if you’ve already sent your IP on an extended European Holiday, there may an urgent need to consider a return ticket. With U.S. tax reform and more BEPS activity and enforcement on the way, there is certainly a laundry list of topics to consider here.
Authors: Rebecca Lara and Kenneth Dettman
We’d love to get your thoughts: What does a border adjustment that applies to the import/export of IP mean to your cash tax forecast? Is there a buzz in the industry around the concept of a U.S. IP Holding Company? Please call or email us and let us know!
