The US Treasury has released the 2012 Green Book (the catchier title for the “General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals” – the 2012 US Budget!). There are three key IP-oriented measures proposed. The first, discussed below, is taxation of “excess returns” on intellectual property. The second, to be discussed in a following blog post, seeks to limit shifting of income through IP transfers. Finally, and also to feature in a future post, is the enhancement and making permanent of the R&E (research and experimentation) tax credit.
Limiting excess returns (page 43 of the Green Book)
The proposal is that the definition of subpart F income should be expanded to include certain “excess income” connected with or benefitting from intangible property transferred by a US person to a related controlled foreign corporation, where the income is subject to a low foreign effective tax rate. The plan is that this should apply to transactions for the 2012 US tax year (1 Jan-31 Dec) onwards – whether .
“Excess income” is calculated by comparing gross income relating to the IP to the costs related to producing that income. If the gross income is more than a percentage mark-up of the costs (the percentage not yet specified) then the amount over the mark-up is considered excess. It’s not clear whether the plan is that a single mark-up is supposed to be representative for all IP – surely that’s not even vaguely feasible? It takes no account of the value added by the IP – the costs of creation may bear no resemblance to the value of the IP in business.
“Transferred by a US person” includes sales, leases, licences and cost-sharing arrangements: whether that last includes properly structured cost-sharing arrangements, where there is no transfer but instead a joint ownership of the IP from creation, remains to be seen.
The Green Book doesn’t define what is a “low foreign effective tax rate” is and, until it does, we’ll have to wait and see whether the UK patent box could bring it into the realm of this proposal.