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Debate Begins On US 'Innovation Box' Proposal

by Mike Godfrey, Tax-News.com, Washington

30 July 2015


A discussion draft has been released on legislation to create an "innovation box" regime in the United States, to encourage domestic investment in research and development (R&D).

The discussion draft was put forward by two senior members of the House of Representatives Ways and Means Committee, Charles Boustany (R – South Louisiana) and Richard Neal (D – Massachusetts). They said that introducing an innovation (or patent) box – like those in several European countries whose rates range from 5-14 percent – "would provide a lower effective tax rate for most corporations across many industries, encourage greater investment in R&D, and attract R&D jobs back to the United States from overseas."

The Boustany-Neal discussion draft, known as the Innovation Promotion Act of 2015, defines "Qualified Intellectual Property" as patents, inventions, formulas, processes, designs, patterns, and know-how (and property produced using such IP), as well as other types of IP such as computer software.

A company's eligibility to tax breaks would be calculated by taking qualifying IP gross receipts, deducting the cost of goods sold and expenses, and multiplying that value by the fraction of a company's budget spent on US R&D. That amount would be subject to a tax rate of 10 percent, rather than the general corporate rate of 35 percent.

Under current law, the repatriation of appreciated IP by a foreign subsidiary of a US company is a taxable event. Under the Boustany-Neal discussion draft, companies with overseas IP would be permitted to bring it back to the United States without triggering a taxable event.

Boustany said that "our tax code has erected barriers for innovators, forcing them to move overseas. … We want that activity here in the United States." Neal added that the United States must do "much more to incentivize companies to locate in America, and create jobs in America. The legislation that [we] have put forward is a commonsense, pro-growth initiative that will attract innovation and the high-paying, high-quality jobs that come with it."

They are seeking feedback on their proposal from other lawmakers and businesses and have posed various technical questions to that end. It is expected that a final version of the proposed legislation will be included in the broader international tax reform that the Ways and Means Committee is expected to develop after the summer break.

Paul Ryan (R – Wisconsin), the Committee's Chairman, welcomed the proposal and pointed out that "this is just one piece of international tax reform, but it's an important one. I applaud [Boustany and Neal] for their work, and look forward to refining the proposal as we move forward on a broader plan to make America more competitive and promote high-paying jobs."

The draft legislation was also applauded by Rob Portman (R – Ohio) and Charles Schumer (D – New York), who led the Senate Finance Committee's international tax reform working group. Portman commented that the "innovation box framework should be carefully considered as we work towards developing policies that will keep intellectual property and its development here in the United States."

It does not appear, however, that the US Administration is currently warm to the new idea. During a discussion on Twitter, White House economic adviser Jason Furman indicated that the Administration would, instead, support an expansion to the existing R&D tax credit that "directly encourages investments in new innovation, best bang-for-buck."

TAGS: tax | investment | business | patents | Intellectual Property | law | intellectual property | tax credits | legislation | tax rates | United States | tax breaks | tax reform | research and development | business investment

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