What President Trump's Tax Reform May Mean For Your Company's IP

On December 1, 2017, the United States Senate passed its version of President Trump’s tax reform legislation.  Touted as a significant help to the middle class and a boon for business, the eventual legislation will be the most significant change to US tax law in the last 30 years.  From a corporate perspective, a reduction in the statutory business tax rate from 35% — the highest of the industrialized nations — to 20% is a powerful incentive for companies to move operations back into the United States (even though the Senate version wants to delay this rate decrease for one year).  This incentive includes valuable corporate assets, such as intellectual property.  That said, such tax reform will force a significant shift in strategic planning and placement of intellectual property assets, which if not addressed, will absolutely impact your the company’s or clients’) bottom line.

It’s no surprise that President Trump has made tax reform a high priority — his significant business background exposed him to the problems with the current tax code and its impact on individuals and businesses, leading him to campaign avidly on the issue.  Combined with Congress’s failure to pass any other significant legislation during his first year in office, tax reform has been rushed with significant vigor.  A cornerstone of that reform strategy was to incentivize US businesses to invest and expand their businesses in the US instead of moving operations (and assets) offshore. Over the past decades, US companies have invested abroad as part of overall tax avoidance strategy, seeking to minimize US corporate tax exposure stemming (at least in part) from the high US corporate tax rate.  Moving IP assets’ underlying sales outside the US to countries with a lower corporate tax rate permitted companies to take advantage of these “tax havens” to limit overall US tax exposure.  Now, all these well-laid plans may need to be overhauled like the US tax code.

Both the House-passed bill and Senate bill contemplate a minimum tax on foreign earnings derived from IP held abroad, forcing a rethink of these strategies by forcing companies with income from IP assets held offshore to pay a “minimum tax” on such income.  Having shielded income from offshore IP assets under the law as currently formulated, US companies are now faced with incentives to repatriate such assets into the US.  This is not insubstantial — well over 2 trillion dollars in untaxed earnings remain abroad. Repatriating these profits from foreign subsidiaries would allow such capital to flow back into US companies and new IP created within the US. The bills as passed by both the House and Senate are attempting to force a tectonic shift in corporate tax exposure for such assets, requiring a rethink of holding IP assets offshore.

By creating a territorial system, however, there is more here than meets the eye, and it seems to be buried in details which will not be settled until a final bill comes out of conference.  For example, how will such a minimum tax affect products that use information technology made in such “tax havens” and provided to US consumers?  Such products would be subject to a minimum tax; however, foreign competitors of such companies selling such products in the US may face a smaller tax burden on their sales in their territory, placing such US companies at a disadvantage.  Simply put, companies may still be tempted to use tax havens and “stripping the tax base” if there is an incentive for them to pay less than the 20% statutory rate.

I am no CPA or tax attorney, but am regularly involved with counseling companies on the development and licensing of IP capital.  Where this capital is created and housed now has a new wrinkle, but one which may result in more companies simply keeping their IP capital in the US, or otherwise restructuring their current IP asset allocation methodology.  First, there can be little doubt that a minimum tax on offshore income derived from IP assets will occur — both the House and Senate bills address this point.  What that minimum tax will be remains to be seen once the bill are reconciled in conference.  A bigger question is whether companies will continue to keep IP assets abroad in light of the minimum tax.  From my perspective, this will continue to occur so long as the minimum tax is either below the indicated 20%, or the mechanism of US companies paying royalties on the foreign-held IP assets (and expensing such payments) continues to lower their overall tax exposure.  Technology and pharmaceutical companies appear most sensitive to these changes, but they are not alone.

It is difficult to address more specifics until the bill is finalized in conference and sent to President Trump’s desk for signature.  That said, companies need to be wary of whether the mechanisms ostensibly designed to repatriate foreign income and IP assets will actually have the desired effect.  The US tax code is a complicated beast, and even the best of intentions made find themselves subservient to other loopholes and incentives.  Without question, tax strategy related to IP assets will need to be re-evaluated; however, the question remains as to whether the new corporate rate, minimum tax on foreign income from IP assets held abroad, and other factors in the legislation will work together to achieve the desired result.  In this case, the old maxim really does ring true: Only time will tell.