By Mark S. Nelson, J.D.
The lure of “patent box” regimes has captivated firms around the globe by enticing them with tax benefits. The SEC staff recently asked GlaxoSmithKline plc (GSK) to explain rapid changes in its overseas tax rates and intellectual property benefits as reported in its annual report on Form 20-F.
U.K. tax rates. The SEC staff directed GSK to identify which tax jurisdictions impacted its financials, and to describe how a patent box regime works. In its initial reply, GSK said its tax rates changed because it moved intellectual property from other jurisdictions into the U.K.’s patent box regime when it finished reorganizing its internal intellectual property ownership structures. GSK said its tax rates had been most impacted by the U.S., India, Japan, and France.
In reply to a follow-up comment, GSK told the SEC it would include new language in its future periodic reports to better explain how patent box regimes impact its business. The proposed language would tell GSK investors that differences in its tax situation arose from moving intellectual property out of countries with rates above the U.K. statutory rate (and a few countries below that rate). Prior unfavorable rates were partially offset by higher profits after GSK’s move into the U.K. patent box regime.
The new text also explains that patent box regimes can reduce corporate income taxes if a company has qualifying patents. In GSK’s case, benefits from the U.K. patent box accounted for much of the company’s total patent box benefits in the prior two years (75 percent in 2014), although the U.K. regime will be phased in over a number years. The SEC later said it had finished its review of GSK’s Form 20-F.
Legislative activity in U.S. Not to be outdone by the U.K. or other countries, U.S. legislators are planning to create a U.S. patent box regime. Patent box regimes are a partial response to the spate of co-called corporate inversions by which a company changes its tax domicile to take advantage of lower overseas corporate tax rates.
Last week, Rep. Charles W. Boustany, Jr. (R-La) and Richard E. Neal (D-Mass) said they plan to publish a discussion draft of their proposal to update U.S. tax laws to include a patent box, or as they call it, an innovation box. A company’s “qualified intellectual property” would be entered into a formula that results in an “innovation box profit” to be taxed at 10 percent instead of at the 35 percent general corporate rate.
The legislation also would make repatriation of overseas intellectual property to the U.S. a non-taxable event. The legislators noted that seven European countries besides the U.K., plus China, already have patent box regimes with tax rates of 5 to 14 percent.
Senators Charles E. Schumer (D-NY) and Rob Portman (R-Ohio) both expressed willingness to pursue patent box legislation following Rep. Boustany’s announcement. The senators recently submitted a report by the International Tax Bipartisan Tax Working Group to the Senate Finance Committee in which they recommend creating a U.S. patent box regime.