Transfer Pricing Associates

Patent Box Incentive Influences Corporate R&D Decisions

post Wednesday June 6, 2012



Patent box programs in Belgium, the Netherlands and other countries are highly influential in decisions about where to make R&D and other investments. “They are very effective when it is time to decide whether to invest in Belgium or some other country” said Louise Weingrod, vice president and tax counsel with Johnson & Johnson.

Patent box programs provide a reduced rate tax of tax on future income related to qualifying intellectual property. Belgium offers a 120% super deduction for research and development. At the same time only 20% of gross profits are taxable under the patent box regime. However, qualifying profits are subject to a tax of between zero and 6.8%.

This all means that you need to earn six times your R&D investment before any tax is owed. This is very generous, but it leads to base erosion concerns for the government.

Weingrod and others at the International Fiscal Association’s U.S. branch meeting, in March, critiqued eight European patent box regimes and singled out those of Belgium and the Netherlands as likely to provide the best benefits for most taxpayers.

A U.S. treasury official has expressed doubt about the United States’ inclination to enact a patent box regime. However, a tax reform plan by the House Ways and Means chairman, David Camp, would create the equivalent of a patent box through a new subpart F category for intellectual property, in which the IP would be subject to a full statutory rate of 15%.

According to Bruce Lassman, vice president of international tax with IBM, the proposal also provides a 40% deduction from Subpart F income for foreign-to-foreign transactions. This would create a “carrot” so that “any royalties that come back to the United States are eligible for this 40% deduction”. This incentive would be significant.

Weingrod mentioned that if the patent box regimes are broad, the incentives are less generous. The patent box in Belgium is limited to patents, compared to Luxembourg where the regime is broader and includes trademarks. She also noted that “in the U.S. we are subject to a more diversified economy and it would be hard to imagine an incentive regime like this not being very broad.”

Weingrod noted that transfer pricing issues can still arise under patent box regimes. In Belgium, for example, the ordinary tax rate is 34%, but under the patent box regime it is 6.8%. “That differential is very large and one can imagine the authorities might challenge how much of your income should be subject to 6.8% versus 34%. We have not seen that yet, but we are not out of the transfer pricing rules, that’s for sure” she said.

Weingrod added that “one issue that concerns us quite a bit is talking about value-based compensation for high-value services. In China and India we are hearing hints around the idea that a high percent of future profits ought to land in that jurisdiction because of R&D services, for example.”

Bebates on the benefits of having a patent box regime in the U.S and whether or not it should be done, still continue to date. Time will tell whether the pro’s outweigh the cons and the U.S decides to join the patent box movement.

[Source: Transfer Pricing Report: News Archive > 2012 > 04/19/2012 > Around the World > United States: Patent Box Incentives Influence Corporate R&D Decisions, Says Johnson & Johnson VP]


Image source: Shalom Atlanta Legacy,

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