Tax reform package includes intangibles

Yesterday, Congressman Dave Camp, the Chairman of the House Committee on Ways & Means, unveiled his proposal for comprehensive tax reform. Most of the focus of attention on the proposal has been on reduction of the corporate tax rate to 25% and a shift to a "territorial" system (which would mostly exempt overseas earnings from US taxes). However, the proposal also address the issue of the taxation of intangible assets. As the summary of the proposal states, the legislation:

Address concerns expressed by commentators that under a participation exemption system, U.S. companies would have an increased incentive to shift income to foreign jurisdictions, especially through the migration of intangible property overseas. To this end, the Committee has included three possible antiabuse rules for consideration: (1) President Obama's "excess returns" proposal; (2) a variation on the low effective tax rate test used in other countries such as Japan; and (3) an option that would lower the corporate tax rate for all foreign intangible income (whether earned by a U.S. parent or its CFCs) to only 15%, but would treat a CFC's foreign intangible income as subpart F income if it is taxed at a rate less than 13.5% (90% of the U.S. rate). This last option combines the carrot of an "innovation box" and royalty relief with the "stick" of a current (subpart F) inclusion for intangibles-related income of CFCs in low-tax jurisdictions.

This last option is similar to what I have suggested for tying a "patent box" with a tightening of intangible assets transfers (see earlier posting). However, I would also suggest crafting the patent box rate so that it applies only to royalties for new licenses for a limited time, such as a sliding scale for three years.

I would also note that President Obama's FY 2012 contains provision on taxation of intangible transfers (see posting early this year). This is the "excess returns" proposal referred to in the above summary of the Camp legislation.

The Camp proposal is just an opening shot in the debate over tax reform. Even the Congressman admits that any final package is a long way off. But, it is very interesting that the issue of taxation of intangible assets and the movement of intangibles to low tax countries (tax havens) is part of the debate.