We are all familiar with the use of offshore intellectual property holding companies to capitalize on international tax gradients. These companies are designed to take advantage of strategic local tax rules to reduce tax burdens on royalty streams generated from licensing. Because of these favorable tax treatments, countries like Luxembourg have gained significant advantages in the international marketplace for favorably taxing intellectual property.
This may all change shortly. The proposed House Republican tax plan could turn the tide and make the United States a haven for intellectual property holding companies. The current House Republican plan would not tax royalties or license fees and, thus, level the international playing field with regard to tax treatment of intellectual property. If Congress moves forward with this plan and other countries don't adopt something similar, the flow of income and assets out of the United States could reverse course, making it akin to a tax haven.
The House Republican plan would shift the United States from a system that taxes U.S. corporate income to a consumption-like tax system called a destination-based cash flow tax. Under the new system, companies can fully deduct capital expenditures, pay a 20 percent rate on earnings and not have to pay tax on exported products.
When creating an intellectual property portfolio, it is critical to plan for potential tax implications based on ownership and licensing of the portfolio.
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