US House Ways and Means Committee members Charles Boustany, Jr., (R-La.) and Richard Neal (D-Mass.) on July 29 released draft innovation box legislation that would lower the tax rate on income from intellectual property to about 10 percent, arguing that the proposal is needed to keep research and development facilities in the US.
The bipartisan legislation, called the Innovation Promotion Act of 2015, also provides for tax-free distributions of qualifying intangible property from a controlled foreign corporation to its US parent.
The draft is designed to “begin the conversation on how the United States can attract and retain the brightest minds and best ideas on Earth,” Boustany said. An innovation box proposal is expected to be included in the larger international tax reform effort being undertaken by the House Ways and Means Committee.
The proposal’s tax benefits would apply to income from a broad category of “qualified property,” namely, patents, inventions, formulae, processes, designs, patterns, knowhow, computer software, and property produced using such IP.
A corporation would be allowed to deduct 71 percent of its “innovation box profit” derived from qualifying intellectual property or 71 percent of the corporation’s taxable income, if less. This deduction translates to an effective tax rate of 10.15 percent on profits that qualify for the deduction.
To determine innovation box profit, qualified gross receipts — namely, gross receipts from the sale, lease, license or other disposition of qualified property to unrelated entities — are reduced by the cost of goods sold, interest, and taxes. The result is then multiplied by the fraction of a company’s budget spent on US research and development during the past five years.
The draft legislation also provides that distributions of qualifying intangible property from a controlled foreign corporation to its US parent will be treated as having a fair market value equal to its basis so that the distribution will not result in Subpart F income to the US parent. The US parent would also receive a 100 percent dividends received deduction on the distribution.
Boustany and Neal have requested feedback on the draft, and particularly seek responses to eight questions, such as how the legislation should provide for allocation of expenses to innovation profits and whether the draft appropriately defines qualified property eligible for tax benefits.
“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. We want that activity here in the United States,” Boustany said.
House Ways and Means Committee Chairman Paul Ryan (R-Wis.) said he welcomed the work and looked forward to refining the proposal as his committee moves forward with its work on comprehensive tax reform.
“We have to fix our entire tax code—top to bottom. But if we don’t act soon to keep American businesses here at home, that challenge is going to be much harder. Foreign competitors are taking over US companies at an alarming rate, and international pressures are only going to make the problem worse in the coming months,” he said.
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