When a US Multinational Corp spends money in the US to develop specific intellectual property, this company immediately gets a federal income tax deduction for these R&D costs.
Regarding these R&D costs incurred to develop specific intellectual property, to be used around the world, in order to generate profits globally, there are several ways that this could work. Let me address two of them.
One option is that this US Multinational Corp could plan to transfer this intellectual property to foreign subsidiaries after all the related US R&D costs have been incurred and the intellectual property is completed.
Under this first option, my recommendation is that, after technological feasibility, there should be a reasonably supportable allocation of these future R&D costs between expected US use and expected Non-US use. And for federal income tax purposes, the R&D costs allocated to Non-US use, instead of being currently deducted for US federal income tax purposes, should instead be initially capitalized as an Intellectual Property asset, since in all likelihood, these costs are expected to be recovered upon later intellectual property transfer.
Then when the intellectual property is actually transferred to foreign subsidiaries, these allocated Non-US R&D costs now capitalized as an intellectual property asset will be used to reduce the amount of gross profit recognized upon intellectual property transfer to foreign subsidiaries, which is in economic substance a sale, no matter what the legal form of transferring the intellectual property to the foreign subsidiary might be.
A second option is that the US Multinational Corp could incur R&D costs to develop intellectual property and could plan to later share, in a cost-sharing arrangement, this intellectual property with foreign subsidiaries after all the related R&D costs are incurred and the intellectual property is completed.
In this second option, my recommendation is that, after technological feasibility, to allocate these future R&D costs, in a reasonably supportable manner, between expected US use and Non-US use. And for federal income tax purposes, all such future R&D costs allocated to Non-US use should not be immediately deducted for federal income tax purposes, but instead should be initially capitalized as an intellectual property asset, since in all likelihood, these costs are expected to be recovered from a planned subsequent cost sharing with foreign subsidiaries.
Then, these R&D costs now capitalized as an intellectual property asset would subsequently be amortized, for federal income tax purposes, over the term of the cost-sharing agreement with foreign subsidiaries.
The economic damage to US Big Multinational Corps from these two proposals is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these costs will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big US Multinational Corps from my two proposals.
The CBO scoring of these two proposals over the next 10 years, and for many years thereafter, will be significantly positive. All of the tax proceeds raised should be used to reduce the US Deficit.
