On June 28, Rep. Allyson Schwartz (D-PA) introduced legislation (H.R. 2605) to amend the Internal Revenue Code of 1986 to allow a deduction for "patent box" profit from the use of U.S. patents (and foreign patents in certain circumstances). The bill, also known as the Manufacturing Innovation in America Act of 2013, is identical to legislation that Rep. Schwartz introduced last year. The term "patent box" refers to a tax incentive that provides a reduced tax rate on profits derived from products that incorporate patents. The tax incentive is known as a "patent box" because there is a box for patent profits to check on the tax form.
In a press release that was issued when the legislation was introduced last year, Rep. Schwartz (at left) noted that while the U.S. "leads the world in innovation and research and development, . . . our current tax code fails to reflect the challenges of a competitive global economy, especially as it relates to domestic manufacturing." According to Rep. Schwartz, the legislation she introduced would "further incentivize innovation, research and development, and manufacturing in the United States [by] reduc[ing] business taxes by more than half, to a 10 percent rate, for companies that manufacture patented products in the United States," thereby "lead[ing] to both U.S. and foreign companies bringing jobs back to the United States, as well as the creation of new jobs." Her co-sponsor last year, Rep. Charles Boustany, Jr. (R-LA) -- who has yet to sign on to the bill this year -- noted last year that:
As the global economy continues to grow, the emergence of tools, such as ‘Patent Boxes,’ seek to drive domestic research and development while creating cutting-edge technologies. Aimed to retain home-grown innovation, these tools allow for countries to promote domestic talent and incentivize companies to expand. America should look toward engaging in this practice as well. This tax rate reduction will lead to job creation across the country in sectors ranging from life-saving medical technology development, to next-generation energy technologies.
Biogen Idec Vice-President Lynne Sullivan indicated that the "legislation takes an important step towards making the U.S. corporate tax system globally competitive, and will drive domestic job growth in research and development and high-tech manufacturing."
Rep. Schwartz explained that the bill would provide a 10% tax rate on the sale of qualifying patented products by American businesses. Among the business sectors that she expects to benefit from the legislation are the pharmaceutical and biotechnology sectors. According to Rep. Schwartz, in order for a company to qualify for the reduced tax rate, the company must have a U.S. patent, and a substantial portion of the patents covering the product must be the result of research and development performed in the U.S. The legislation specifies that a foreign patent may also be treated as a "qualified patent" under the bill if the foreign patent is "for the same or substantially similar invention or application" as a U.S. patent that the taxpayer holds or exclusively licenses, and provided that the taxpayer holds or exclusively licenses the foreign patent. The bill's definitions of patent box profit, IP profit, routine profit, allocation method, patent gross receipts, and qualified patent property fall well outside the scope of this blog, so readers (and tax attorneys) who are interested in obtaining more details should consult the bill itself.
Noting that "[o]ur global economic competitors -- including China, France, Spain and soon the United Kingdom -- have tax rates varying from 5 to 10 percent on the income generated from patents or other types of intellectual property," Rep. Schwartz believes that H.R. 2605 would fix "an outdated tax code that doesn't reflect our 21st century innovation economy," and encourage companies who conduct research an product development in the U.S. to also establish manufacturing operations in this country, rather than overseas.
After being introduced, the bill was referred to the House Committee on Ways and Means.