Intellectual Property has become the most valuable assets of many US Multinational Corps.
Since this Intellectual Property ends up being used in many countries, an intense focus is spent by US Multinational Corps to determine where this Intellectual Property gets placed around the globe, and how it gets transferred or shared around the globe.
A key aspect to this Intellectual Property planning is the optimal tax strategy.
Clearly, you see Big US Multinational Corp use foreign tax havens to their best advantage.
Much of the Intellectual Property of US Multinational Corps results from R&D work done the US. These Corps get upfront R&D federal income tax deductions, as well as R&D tax credits, for this work.
Let's say that after this Intellectual Property Asset has been developed in the US, that the plan is for the US Multinational Corp to transfer this property to a foreign subsidiary of affiliate in the foreign tax haven of Ireland, which has a 12.5% corporate income tax rate, or to Puerto Rico, where the corporate income tax rate is even lower.
How should this Intellectual Property Asset Transfer be handled for US federal income tax purposes?
Here's my proposal to be fair to both US citizens and to the US Multinational Corp.
In all cases where Intellectual Property is transferred by a US Multinational Corp to one of its foreign subsidiaries or foreign affiliates, this transaction is always treated for US federal income tax purposes as a taxable sale, with ordinary gain or ordinary loss treatment. In nearly all cases, an ordinary gain results.
But how to fairly compute the selling price, which is key to determine the ordinary gain recognized?
I think the US tax rules should only allow this Intellectual Property Transfer Price to be computed one way.....the single best way it can be derived.....period
And what is that best method of ascertaining a transfer price?
That doesn’t seem too difficult in theory, or frankly, even in practice.
The US Multinational Corp making the transfer is certain to have already done future incremental revenues and related incremental income projections for the intellectual property after it is transferred to the Intl location. Thus, present value of future incremental income is the winning selling price here over the period of time the foreign subsidiary or foreign affiliate is expected to benefit from the use of the intellectual property transferred.
This is a with and without computation.....that is.....what is the expected future income of the foreign subsidiary or foreign affiliate assuming it has the use of this intellectual property, and then what is the expected future income of this foreign subsidiary or foreign affiliate assuming this intellectual property doesn’t get transferred, and then the difference would be the incremental income.
And lastly, this incremental income would need to be discounted to derive a present value on transfer date. The IRS should issue rules for how to compute the future expected incremental annual income, how to determine the number of years to discount these earnings, and also how the discount rate is to be determined.
Also, there should be subsequent "look-back" rules, several years or so out, to make sure the incremental income estimates used by the US Multinational Corp to derive the transfer price were reasonable. And then in cases where it is determined that the subsequent review shows that the initial estimated annual incremental income was both clearly and substantially understated, a new computation of the transfer price is made, with a resultant increase in ordinary income recognized for US federal income tax purposes.
All of the tax proceeds from my proposal here should be used to reduce the US Deficit.
