Tax Reform Flips International IP and Tax Structuring into Reverse

By: PJ Patel | Raymond Weisner

Singapore

The (tax) time machine is running backward.

Since the recent passage of U.S. tax reform (Tax Cuts and Jobs Act of 2017), VRC has noticed an emerging phenomenon: U.S.-based multinationals are taking steps to move intellectual property (IP) back into the U.S.

Tax reform reduced the U.S. corporate tax rate from 35 percent to 21 percent, and also made it harder to avoid U.S. taxation by imposing an additional tax rate on intangible property of U.S. multinationals held overseas – referred to as the GILTI tax (Global Intangible Low Tax Income). This incremental tax, plus the reduction in U.S. corporate tax rates, is spurring companies to move their IP back into the U.S.

Recently VRC’s clients have been seeking assistance with:

  • Moving IP that supports a primarily U.S.-based manufacturing operation from Mexico into the U.S.; this same IP was previously moved out of the U.S. into Mexico.
  • Transferring IP from a Luxembourg IP Holdco to the U.S. Notably, this IP transfer was only for the non-U.S. IP rights. This move comes despite Luxembourg’s 5.7 percent tax rate on most IP.
  • The sale of a multinational entity and its underlying IP from a foreign-held entity to a U.S. based legal entity.

VRC believes the primary motivation for this somewhat unprecedented movement of IP is due to the reduction in the U.S. tax rate and the prospect of additional tax on offshore IP held in low tax jurisdictions. The result is a significant reduction in effective tax rate differences between the U.S. and the combination of U.S. and the non-U.S. low tax jurisdiction. As these differentials are now less extreme, the expense and resources required to maintain complex tax structures are being re-evaluated.

This presents an opportunity for U.S.-based multinationals to team up with their tax advisors and VRC to assess the value of their global IP, reassess their global IP footprint and evaluate whether it is still worth the time and expense, and often incremental tax risk, to continue with the current and often complex tax structures of a foreign IP.

For an in-depth conversation of this topic, we welcome you to contact a VRC professional.