Unexpected Consequence of US Tax Reform: International Patent Pinball

IP intensive US corporations have gained a tangible, potentially very profitable benefit from the tax reform signed into law in December 2017.  A new provision reduces taxes on “foreign derived intangible income,” i.e., Intellectual Property (IP) -- primarily patents.  However, in yet another “all that glitters…,” this new benefit doesn’t arrive without its requirements for a
new level of analysis and decision-making.

In  a comprehensive January 24, 2018 Wall Street Journal article by Sam Scheckner, Tax Change Aims to Lure Intellectual Property Back to the U.S. - WSJ, the tax rates was dropped to 13.125% until 2025 which corporations view as a major improvement over the prior rate of up to 35%. As the author states, this is a serious attempt to bring back assets from countries such as Ireland that had a much lower tax than the US for years.  Corporations, such as Google and Facebook, while not commenting for the article, have in place elaborate asset transfer schemes- see “Double Irish” across multiple countries to gain the optimum tax rate.  

The US action to reduce the asset rate has not gone unnoticed by these other countries.  Several are revising their tax rate in response to and to outflank the US change.  This has driven US corporations with overseas operations to reengage in asset number crunching -- aka patent pinball -- to

land on the country with the optimum package. The patent number crunching could involve licensing versus barrier patent protected product revenues versus sales versus tech transfer partnerships depending on the terms and conditions in a given country.  And as countries change their tax laws in
what amounts to revenue one-up-manship, patent pinball is certain to become an ongoing game.

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