House Republicans are pushing for the next pandemic relief bill to include incentives for companies to bring home offshore intellectual property. (AP)
overhauled the federal tax code and eliminated many of the incentives for offshore income-shifting, it left the structures themselves intact, and companies have been reluctant to undo them as the law remains young.Onshoring IP would remove an obstacle for companies to use it in the U.S. — either to develop new technologies or to support domestic manufacturing, according to the House GOP.
Skeptics claim the $34 billion bill has little to do with stimulating an economy burdened by the pandemic and lockdown.
Current law gives companies plenty of reasons to onshore the intellectual property they spent decades pushing offshore in licensing and cost-sharing agreements. Income from intangible assets held domestically may qualify for a reduced 13.125% tax rate as foreign-derived intangible income. The same income, held offshore, may fall under the global intangible low-taxed income regime, which is meant to penalize companies for holding intangibles abroad. Those carrot-and-stick provisions ultimately ensure neutrality in decisions about where to locate IP, the TCJA's authors said when it was passed.
The TCJA also included a deemed repatriation that allowed companies to bring home offshore income after it had paid a one-time transition tax. But the intangible assets that generated that income were not brought home with it, and they must be repatriated under the normal tax rules.
And companies still face a potential tax charge when bringing a valuable asset home. Upon repatriation, if the property has gained value offshore, the company's taxable income will increase based on that gain for that year, depending on how it classifies the transaction. Even though it's a one-time payment, it could be enough to discourage the transaction.
LaHood's bill was included in a package of legislation released by Republicans on the U.S. House Ways and Means Committee intended as the next round of relief addressing the economic havoc wreaked by the global spread of the novel coronavirus, which causes the respiratory illness COVID-19. LaHood's proposal would eliminate those tax consequences for repatriation of currently held intangible assets, although it would not apply to companies that sell those assets later on.
The Senate version of the TCJA, passed in November 2017, included a similar provision that the Joint Committee on Taxation estimated would reduce revenues by $34 billion over the next decade. The provision was stripped from the final law.
IP ownership ultimately amounts to a legal designation — it doesn't necessarily correspond to where the technology was produced or where it is used. But supporters of the bill say that on the margins, those designations can add friction that can hinder the use of technology.
"U.S. ownership makes it easier to exploit the IP in the United States, for example by licensing it to a U.S. manufacturing affiliate," George Callas, a managing director at Steptoe & Johnson LLP, wrote to Law360. "So this is both about broadening the U.S. tax base and making it easier from a tax perspective to utilize the IP domestically, which leads to more real economic activity."
Callas previously was a chief tax counsel on the Ways and Means Committee and was senior tax counsel to then-House Speaker Paul Ryan during the passage of the TCJA.
Aside from manufacturing, encouraging IP ownership in the U.S. would make it easier for companies to use that technology in research and development, according to House Republicans. In theory, that could spark the creation of new intellectual property, now held in the U.S.
The bill would allow companies to "continue to hold and use formerly foreign IP within the U.S. to support U.S. production and associated research and development," supporting "high-paying jobs in production and applied research and, ultimately, a higher standard of living for all Americans," according to a statement from Republicans on the Ways and Means Committee.
Critics view it as a tax giveaway, however.
"This is almost pure paper shuffling," said Stephen Shay, an adjunct professor at Boston College Law School and a former Treasury official. "Awful, awful tax policy with zero benefit to the U.S. economy."
The one-time tax charge may not be the primary factor motivating companies to keep their structures intact. Many practitioners say that taxpayers are wary of the law's political stability and wonder if a Democratic administration would hike tax rates and remove incentives such as the deduction for foreign-derived intangible income.
Representatives of LaHood's office and the Democratic staff of the Ways and Means Committee did not respond to requests for comment.
LaHood's bill was not included in the package of proposals from the Senate GOP released Monday, and it could face opposition and skepticism after corporate tax relief in the Coronavirus Aid, Relief and Economic Security Act
, enacted in March, provoked a backlash."I'm highly skeptical of taking anything from the old playbook and putting it forward as a COVID recovery measure," said Marc Goldwein, senior vice president and policy director for the Committee for a Responsible Federal Budget, a Washington-based think tank and advocacy organization. "The economy isn't suffering at the moment from an innovation shortage or a dearth in investment — it's suffering from a pandemic."
--Editing by John Oudens and Tim Ruel.
Correction: An earlier version of this story misstated Stephen Shay's position. The error has been corrected. This story also has been updated to clarify the attribution of a quote.
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