WASHINGTON – Senate Republicans plan to propose a new, 12.5% tax on the foreign income that U.S. companies generate from patents, copyrights and other intellectual property.
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The tax is meant to address U.S. companies -- especially pharmaceutical and technology businesses -- that transfer intangible assets to low-tax countries outside the U.S. to reduce their overall tax bills.
Under the plan, the new tax would be applied to a company's foreign income regardless of whether the intellectual property is located in the U.S. or abroad, according to Senate Finance Committee aides. It is meant to incentivize U.S. companies to keep their existing patents in the U.S. and move those abroad back home. It would be levied alongside a new, lower 20% corporate tax rate on all domestic profits.
The concept is part of the Senate GOP's broader tax plan, which is scheduled to be released Thursday and slated for committee consideration next week. The international tax provisions are among several significant differences between the emerging Senate plan and the one the House Republican leadership wants to pass as soon as next week.
The House tax plan has a provision aimed at addressing the same issue. It would create a 10% tax on foreign subsidiaries with high profits.
Senate aides say their plan better levels the global tax playing field. A U.S. company selling pharmaceuticals in Germany would have the same 12.5% tax rate regardless of whether its patent is held in the U.S. or Ireland, they said. That could encourage companies to bring their intellectual property to the U.S. tax-free to take advantage of the U.S. legal system and patent protection.
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The Senate concept resembles, but isn't identical to, the "patent box" systems used by countries such as the U.K. to offer discounted tax rates on income that can readily be moved from one country to another. Countries outside the U.S. have become more aggressive in taxing U.S. companies' profits and the Senate plan could help the U.S. get some of that revenue instead.
Under current law, American companies owe U.S. taxes on their global profits. They gain tax credits for tax payments to foreign governments, but they don't have to pay the residual U.S. tax until they bring the profits home. That creates an incentive for companies to book their profits abroad and leave them there.
Corporations have found it particularly easy to do that with intellectual property such as patents, including those used by the largest high-tech and pharmaceutical companies. Those items are easy to move abroad to a low-tax country.
Then, all non-U. S. profits flow to that location and the company enjoys the low tax rates unless they repatriate the profits. Meanwhile, the company can concentrate deductions in the U.S. to lower its domestic taxable income against what is now a 35% corporate tax rate.
Republicans want to create what is known as a territorial tax system, like those used in much of the rest of the industrialized world. The idea is that U.S. companies wouldn't pay taxes on their foreign income. But that creates a challenge for intellectual property, because a pure territorial system would give U.S. companies even greater incentive to report profits in lower-tax countries.
Detailed summaries, legislative language and revenue estimates on the Senate plan weren't available early Thursday, and the measure will get tested as companies, Democrats and tax experts scour it.
Write to Richard Rubin at firstname.lastname@example.org
(END) Dow Jones Newswires
November 09, 2017 13:15 ET (18:15 GMT)