Congressman Kevin Hern (R-Okla.) last week led a letter urging Janet Yellen, the secretary for the Department of the Treasury, to reconsider repealing the foreign derived intangible income (FDII) tax rules.
Rep. Hern was joined by all Republican members of the Ways and Means Committee: Ranking Member Kevin Brady (R-Texas), Devin Nunes (R-Calif.), Rep. Adrian Smith (R-Neb.), Rep. Jodey C. Arrington (R-Texas), Rep. Vern Buchanan (R-Fla.), Rep. Ron Estes (R-Kan.), Rep. Drew Ferguson (R-Ga,), Rep. Mike Kelly (R-Pa.), Rep. Darin LaHood (R-Ill.), Rep. Carol D. Miller (R-W.Va.), Rep. Tom Reed (R-N.Y.), Rep. Tom Rice (R-S.C.), Rep. David Schweikert (R-Ariz.), Rep. Jason Smith (R-Mo.), Rep. Lloyd Smucker (R-Pa.), Rep. Jackie Walorski (R-Ind.), and Rep. Brad Wenstrup (R-Ohio).
President Biden has proposed repealing the FDII deduction as part of his Fiscal Year 2022 budget. In all, Biden has called for 30 tax increases totaling almost $3 trillion over the next decade.
If this tax increase goes into effect, it will ship American intellectual property and jobs overseas, creating long-term economic damage to the country. This proposal would undermine American competitiveness and benefit foreign countries like China that provide extensive and generous tax credits and subsidies to incentivize IP.
What is FDII?
FDII is one of several international tax provisions passed into law in the 2017 Tax Cuts and Jobs Act. FDII acts in concert with another provision, GILTI (global intangible low-tax income) to apply a “carrot and stick” approach to the taxation of intangible income (income derived from rents, royalties etc.) that is easily allocated to low-tax jurisdictions.
Under this system, U.S. taxpayers are provided a tax cut on foreign income generated from IP held in the U.S. They face a corresponding tax penalty on income from IP held overseas.
FDII provides the benefit through a deduction for qualifying “deemed intangible income” equal to 37.5 percent, creating an effective rate of 13.125 percent on qualifying income when taken against the current 21 percent corporate rate.
Effective 2026, the FDII deduction will decrease to 21.87 percent, creating a 16.41 percent rate on qualifying income.
Repealing FDII would benefit America’s rivals like China and Europe
By repealing FDII, the Biden administration would disadvantage U.S. businesses with foreign competitors in China and Europe. Compared to the tax provisions offered by many countries, the tax benefit associated with FDII is relatively modest. However, repealing it threatens to leave American businesses vastly far behind foreign competitors when it comes to promoting IP.
For instance, China recently enacted a 200 percent “super deduction” for eligible research and development expenses and has a preferential 15 percent tax rate for high-tech enterprises.
Promoting American IP will help U.S. competitiveness and job creation
As it stands, the U.S. already provides relatively modest tax benefits to IP in comparison to the generous tax subsidies provided by many foreign countries.
In fact, according to a 2020 study by the Information Technology & Innovation Foundation, the U.S. ranks 24th out of 34 comparable countries in the Organization for Economic Cooperation and Development (OECD) of the four-member BRICs (Brazil, Russia, India, and China).
The U.S. is significantly behind in this space and policymakers should be doing more, not less to promote IP. Doing so would have significant economic benefits for American workers and businesses.
According to a 2016 study by the United States Patent and Trademark Office, IP-intensive industries directly and indirectly supported over 45 million jobs, or about thirty percent of all American workers. These jobs are high-paying – a worker in IP intensive industry earned an average of 46 percent higher wages than the average wage of workers in a non-IP intensive industry.
Similarly, the Bureau of Labor Statistics found that jobs tied to R&D pay an average of $134,978 – 2.4 times higher than the average wage.
There is Strong Historical Support for Incentivizing IP Through the Tax Code
In the past, Democrats and Republicans believed that the tax code should help encourage IP in the U.S. For instance, a 2015 Senate Finance Committee International Tax Reform Working Group co-chaired by Senator Rob Portman (R-Ohio) and Senator Chuck Schumer (D-NY) concluded that Congress should encourage the development and ownership of IP in the US:
“The co-chairs agree that we must take legislative action soon to combat the efforts of other countries to attract highly mobile U.S. corporate income through the implementation of our own innovation box regime that encourages the development and ownership of IP in the United States, along with associated domestic manufacturing. They continue to work to determine appropriate eligibility criteria for covered IP, a nexus standard that incentivizes U.S. research, manufacturing, and production, as well as a mechanism for the domestication of currently offshore IP.”
At the time, there were several proposals by lawmakers to create new tax incentives to promote American IP. For instance, as a report by the Congressional Research Service noted, Congressman Richie Neal (D-Mass.) had one proposal while Senator Dianne Feinstein (D-Calif.) had another:
“Proposals for a patent box in the United States include a draft proposal by Representatives Boustany and Neal, the Innovation Promotion Act of 2015, proposed legislation made by Senator Feinstein in the 112th Congress, and a bill introduced by Representative Schwartz in the 113th Congress (H.R. 2605). The Feinstein proposal provided a 15% tax rate on income from patents developed and used for manufacture in the United States, whereas the Boustany-Neal proposal and H.R. 2605 allowed a 71% deduction of income, which produces an effective 10% statutory rate on income in the patent box.”
As Rep. Hern states in his letter, “We know that when the businesses and workers in our districts have a level playing field, they can compete and win, even in an increasingly competitive global marketplace.”
All lawmakers should object to repealing FDII tax rules, so as to maintain American competitiveness and protect American intellectual property and jobs.