Blog by Alexandra Tasev, Senior Associate
The patent box is an intellectual property incentive that reduces corporate tax rates on any income derived from intellectual property assets.[1] The two main goals of the system are to “encourage and attract local research and development (R&D) and to incentivize businesses to locate IP in the country.”[2] Because intellectual property is highly mobile, companies have many motives to “relocate their research and innovation activities (and associated revenue) offshore to minimize tax [consequences].”[3] Despite the name, eligible intellectual property includes more than just patents and “income derived from [the intellectual property] can include royalties, licensing fees, gains on the sale of [intellectual property], sales of goods and services incorporating [intellectual property], and patent infringement damage awards.” Thus, any of these revenue sources may help businesses qualify for a reduced tax rate.[4]
Although the United States has yet to adopt a patent box system within our Internal Revenue Code (IRC), in the last 20 years, patent boxes have grown widely popular, especially in Europe.[5] As of 2022, 13 out of the 27 European Union members have implemented patent box systems, with reduced tax rates ranging from 0% (San Marino) to 12.5% (Turkey).[6] Before the enactment of the 2017 reform, the average United States corporate tax rate was 35%.[7] Now, the United States has enacted a flat 21% rate,[8] but Congress is still hesitant to enact a patent box system. In comparison to the European countries that have already adopted the patent box system, the United States’ 21% flat corporate tax rate is relatively high. However, if the United States were to adopt such a system, we would be able to better compete with the lower European rates, “keep mobile intellectual property from leaving the United States,” and “further support domestic innovation.”[9]
[1] Cherie L. Jones, Adam A. Rogers, & Damian J. Smyth, Should the United States Enact a Patent Box?, Tʜᴇ Tᴀx Aᴅᴠɪsᴏʀ (Nov. 1, 2016) https://www.thetaxadviser.com/issues/2016/nov/should-us-enact-patent-box.html#:~:text=Many%20countries%20have%20enacted%20patent,enacted%20a%20patent%20box%20system.
[2] Daniel Bunn, Patent Box Regimes in Europe, Tᴀx Fᴏᴜɴᴅᴀᴛɪᴏɴ (Aug. 23, 2022) https://taxfoundation.org/data/all/eu/patent-box-regimes-europe-2022/.
[3] Supra note 1.
[4] Supra note 2.
[5] Supra note 1.
[6] Supra note 2.
[7] United States Corporate – Taxes on corporate income, PᴡC (Aug. 8, 2023) https://taxsummaries.pwc.com/united-states/corporate/taxes-on-corporate-income.
[8] See 26 U.S.C. 11 §13001.
[9] Jason J. Fichtner & Adam N. Michel, Don’t Put American Innovation in a Patent Box: Tax Policy, Intellectual Property, and the Future of R&D, Mᴇʀᴄᴀᴛᴜs Oɴ Pᴏʟɪᴄʏ (Dec. 7, 2015) https://www.mercatus.org/students/research/policy-briefs/dont-put-american-innovation-patent-box-tax-policy-intellectual.