U.S. companies would be eligible for a discounted 10 percent tax rate on a portion of profits from patents, formulas and other intellectual property in a plan that marks a major step toward a revamp of international tax rules.
The proposed “innovation box” released Wednesday by Representatives Charles Boustany and Richard Neal would provide a significant incentive for companies to generate profits in the U.S. and receive a discount off the 35 percent corporate tax rate. The draft plan will invite a lobbying push in coming months as companies seek to ensure their income qualifies for the low tax rate.
The proposal likely will be a boon for technology and pharmaceutical companies and high-tech manufacturers, while retailers may not see much benefit.
Boustany, a Louisiana Republican, and Neal, a Massachusetts Democrat, unveiled details that will be incorporated into a broader effort by Ways and Means Committee Chairman Paul Ryan to change the U.S. international tax system. The discussion draft is subject to change.
Ryan, a Wisconsin Republican, wants a one-time tax on about $2 trillion of stockpiled overseas profits to fund highway construction as part of a transition to a system in which companies could repatriate future foreign profits without paying U.S. taxes.
Ryan’s plan and the innovation box will face immense technical and political hurdles, the same ones that have prevented Republicans from advancing their biggest tax ideas since they took control of Congress in 2011.
Congress is nearing a temporary extension of highway programs through October. That gives Ryan and his allies a three-month time frame to reveal the rest of their international tax plan and demonstrate that it’s plausible and politically acceptable to both parties.
The innovation box, which wasn’t in previous Republican plans, would cost the government revenue and would need to be paired with other provisions that make it harder for companies to avoid taxes.
The bipartisan cooperation from Boustany and Neal on the innovation box -- along with similar Senate work by Ohio Republican Rob Portman and New York Democrat Charles Schumer -- shows that influential members of both parties want to pursue a tax system like the one the U.K. is implementing.
“Today, our tax code has erected barriers for innovators, forcing them to move overseas to create these exciting new products that are changing the way we live and work every day,” Boustany said in a statement. “We want that activity here in the United States.”
Linking Taxes, Highways
Boustany and Neal don’t have an official revenue estimate for their plan yet. There’s some initial reluctance from President Barack Obama’s administration to the concept of an innovation box, even though Ryan and Obama agree on the idea of linking international taxes to highway funding.
Jason Furman, chairman of the Council of Economic Advisers, was asked Tuesday on Twitter whether the administration could support an innovation box.
He responded by expressing support for the research and development tax credit, saying it “directly encourages investments in new innovation” and has the “best bang-for-buck.”
Treasury Secretary Jacob J. Lew said Wednesday that a bipartisan tax-and-infrastructure plan was “doable” though it was “nowhere near the point” of having a plan he can take to Obama.
‘Ruffling Some Feathers’
“It’s going to require a little push, because it’s hard,” Lew said at a breakfast sponsored by the Christian Science Monitor. “There is no way to do this without it ruffling some feathers, but it’s worth it because it’s going to help us pay for infrastructure in a meaningful way and it will help fix the broken business tax system.”
Under current law, U.S. companies owe the full 35 percent rate on profits they earn around the world. They receive tax credits for payments to foreign governments, and then only have to pay the residual U.S. tax when they bring the money home.
That system encourages companies to book profits overseas and leave them there. That’s exactly what companies such as Google Inc. and Apple Inc. have done by holding intellectual property in low-tax jurisdictions and using it to generate lightly taxed foreign profits.
Those maneuvers have attracted the attention of governments around the world. They are writing coordinated rules through the Organization for Economic Cooperation and Development that could force companies to locate their intellectual property and research jobs in countries where they have real economic activity.
Republican lawmakers, worried about the steady erosion of the U.S. tax base, are now trying to mimic what other countries have done. They’re trying to do it without touching the corporate rate, saving that issue for 2017, when they hope to have a president more interested in lowering individual and corporate rates together.
Here’s how the Boustany-Neal proposal would work:
Companies would calculate which of their profits are attributable to intellectual property such as patents, inventions, computer software, formulas and processes. Marketing intangibles such as brand names and trademarks wouldn’t count.
They would multiply that profit by a fraction where the numerator is domestic research and development spending and the denominator is the company’s total budget, after subtracting the cost of goods sold, interest, losses and taxes.
The resulting number would get the 10 percent tax rate.
Companies would also be able to repatriate intellectual property tax-free.
A House Republican tax aide, speaking on condition of anonymity to describe the proposal, said there were no estimates yet for what percentage of corporate profits would qualify for the break and how much intellectual property would be repatriated.