A Republican Idea for Onshoring Pharmaceutical Intangible Assets

A Republican Idea for Onshoring Pharmaceutical Intangible Assets

Alex Parker reports on a proposal from Representative Darin LaHood:

As part of the next round of pandemic relief, House Republicans are pushing new incentives for companies to bring home offshore intellectual property — something that they contend could boost job growth but that critics see as another corporate giveaway … While the 2017 Tax Cuts and Jobs Act overhauled the federal tax code and eliminated many of the incentives for offshore income-shifting, it left the structures themselves intact, and companies have been reluctant to undo them as the law remains young.

I think we admitted these 2017 tax cuts for the rich were complex so permit me to slightly disagree with Mr. Parker’s excellent reporting. If the intellectual property (IP) were left offshore, the GILTI income would face a tax rate of only 10.5% whereas onshore IP would face that FDII rate of 13.125%. Why bring the IP back home and face a higher rate? But I interrupted Mr. Parker who basically notes all these nuances:

Current law gives companies plenty of reasons to onshore the intellectual property they spent decades pushing offshore in licensing and cost-sharing agreements. Income from intangible assets held domestically may qualify for a reduced 13.125% tax rate as foreign-derived intangible income. The same income, held offshore, may fall under the global intangible low-taxed income regime, which is meant to penalize companies for holding intangibles abroad. Those carrot-and-stick provisions ultimately ensure neutrality in decisions about where to locate IP, the TCJA’s authors said when it was passed. The TCJA also included a deemed repatriation that allowed companies to bring home offshore income after it had paid a one-time transition tax. But the intangible assets that generated that income were not brought home with it, and they must be repatriated under the normal tax rules. And companies still face a potential tax charge when bringing a valuable asset home. Upon repatriation, if the property has gained value offshore, the company’s taxable income will increase based on that gain for that year, depending on how it classifies the transaction. Even though it’s a one-time payment, it could be enough to discourage the transaction.



Didn’t I say this was complex? Here’s the deal. Biopharma multinationals transferred their IP offshore at lowballed values generally based on some fancy disinformation posing as valuation reports. But now that we know that the profits are quite high, they might be asked to pay effectively a capital gains tax based on the true value of the IP. Of course, only a Republican could object to this:

LaHood’s proposal would eliminate those tax consequences for repatriation of currently held intangible assets, although it would not apply to companies that sell those assets later on. The Senate version of the TCJA, passed in November 2017, included a similar provision that the Joint Committee on Taxation estimated would reduce revenues by $34 billion over the next decade. The provision was stripped from the final law.

We were right to strip this loophole from the 2017 but of course, now Republicans want to sneak it into the tax code.