Within the last decade a growing number of countries have adopted some form of “patent box” or “innovation box” into their tax codes. So named because they can take the form of a check box on a corporate tax form, these policy innovations generally give companies a significantly lower tax rate on profits generated through patents, research, innovation, or other creative activity. Because the United States competes with these countries in a global market where capital and labor are increasingly mobile, it is important that lawmakers add an innovation box to U.S. corporate tax law. Otherwise, the United States will continue to lose global economic competitiveness, especially in innovation-based industries, and the jobs and economic activities that go with that. And with the implementation of the OECD base erosion and profit shifting (BEPS) package, other nations will likely insist on transfer of tangible economic activity from the United States in order to take advantage of their lower rates.
The drafters of an innovation box have to address a number of design issues:
- The type of revenues or profits that qualify for the lower rate.
- The precise level of the lower income tax rate. This can be set either by creating a new statutory rate for these profits or by allowing companies to deduct a portion of their innovation box profits from their taxable income, thereby exposing a portion of total profits to the normal statutory rate.
- The events that trigger the lower rate. This can range from obtaining a patent to conducting research and development.
As the Information Technology and Innovation Foundation has pointed out, countries have answered these questions in different ways. For example, at the beginning of 2015, 11 member states of the European Union (EU), as well as Liechtenstein and the Swiss Canton of Nidwalden, used an innovation box system. Tax rates for eligible income in these countries vary between 0 percent (Malta) and 15 percent (France). This report provides an overview of patent or innovation box provisions in select OECD countries. It then summarizes the leading proposals under consideration in the U.S. Congress, explains why, contrary to both liberal and conservative critiques, an innovation box would greatly benefit the United States.