By Alex M. Parker
Dec. 13 — The pivotal role that intellectual property and other intangible assets play in the international tax planning game could be about to change—drastically.
The unexpected Republican victories in November have elevated plans to overhaul the U.S. tax system from a distant prospect to an immediate near-certainty. No one is sure yet which of the various tax plans will be codified into law. But any overhaul may not just change the direction and destination of intangibles-based tax planning—it may alter the very nature of pricing online transactions in the increasingly all-encompassing digital world.
“The landscape is going to change, in a number of ways, particularly for IP-heavy industries, such as pharmaceuticals and the tech sector,” said Jorge Castro of Castro Strategies LLC, a former IRS official and congressional tax counsel.
As Washington lawmakers, legislative staffers, lobbyists and practitioners scramble to make sense of the post-2016 landscape, the blueprint unveiled by House Speaker Paul D. Ryan (R-Wis.) in June appears to be rising to the forefront. It competes with President-elect Donald Trump's simpler campaign plan, as well as the comprehensive legislation unveiled by then-House Ways and Means Committee Chairman Dave Camp (R-Mich.) in 2014.
Ryan's blueprint would transform the U.S. corporate income tax into a turnover-based, border-adjusted consumption tax, targeting imports and domestic sales but exempting exports. The effect would be to shift toward a destination-based system, in which the location of sales—not necessarily assets—becomes the key in determining whether profits should be taxed in the U.S.
By exempting exports, the system would become territorial, fulfilling a long-time goal of the conservative economic ideology—although one on which Trump wavered throughout his campaign.
If tax legislation were enacted along the lines of the blueprint, it would change the very nature of intangibles-based tax planning, many professionals said.
“The underlying principles of the blueprint are to significantly change all of the incentives that are currently in the system that motivate companies to do planning offshore,” said Ray Beeman, a principal with Ernst & Young LLP and a former staff counsel to Ways and Means, who helped write the 2014 Camp draft.
Under the plan, royalty payments from an offshore subsidiary for use of a patent, trademark, copyright or other intangible asset would become an exempt export.
“With Camp, one of our goals was to achieve neutrality, where you can get the same treatment no matter where your IP is,” Beeman said. “The blueprint goes past that to actually create an incentive to keep it here, rather than go overseas.”