Tech mounts pre-emptive strike on taxes

Getty Images

The tech industry is ramping up its lobbying efforts on tax reform, seeking to make sure it doesn’t end up the loser if Washington can finally find a consensus on rewriting U.S. tax laws.

The Tax Innovation Equality Coalition, or TIE, a group that counts both technology and pharmaceutical titans among its members, released a report Monday that seeks to protect the tax treatment of patents, copyrights and other intangible properties.

Matthew Slaughter of Dartmouth, the report’s author, argued that wringing more taxes out of the most innovative companies in the U.S. would be counterproductive in the long run, noting that President Obama just insisted that he and Congress can do more to produce more better-paying U.S. jobs.

“If you’ve got a goal of creating good jobs, with good wages, and more of them in the United States, you really care about having IP jobs in the United States,” Slaughter said, referring to companies that have lots of intangible property.

The TIE Coalition was formed in 2013, at a time when the top tax writers in both the House and the Senate were making a full-throttle push for tax reform. But the coalition’s activities died down in 2014, when election-year politics shunted tax reform to the side, before returning to the scene with Monday’s report.

The coalition, whose members include Microsoft, Netflix and Amgen, now is now urging lawmakers not to treat intangible offshore property — which is essential to top tech companies like Microsoft and Apple — more harshly than brick-and-mortar assets. But liberal groups and lawmakers insist it’s far easier for companies to shift assets like copyrights and patents to low-tax countries, making tougher rules for those intangible properties a necessity.

“Intangible income is so easily manipulated on paper,” said Matthew Gardner of the Institute on Taxation and Economic Policy, a liberal group that has called out U.S. multinationals for what it sees as tax avoidance strategies. “You just can’t allow people to simply call it foreign income.”

Slaughter, the incoming dean at Dartmouth’s business school, focused his paper largely on the tax reform proposal from former House Ways and Means Committee Chairman Dave Camp (R-Mich.), who retired at the end of last year.

Like other Republicans, Camp wanted to limit U.S. taxation of offshore corporate income and move away from the current system that taxes a multinational company on all worldwide income. (Corporations can defer paying taxes on that income until the profits are brought back to the U.S.)

But in his plan, Camp also proposed tougher offshore rules for property like copyrights and patents, in effect proposing a tax on those assets 12 to 20 times higher than that of tangible property. Such a move, Camp insisted, would diminish companies’ incentives to stash those intangible assets abroad.

That sort of plan would raise roughly $115 billion over a decade, but Slaughter argues that incentive isn’t necessary for an industry he says is directly responsible for some 27 million jobs. Instead, he made the case that U.S. companies that conduct research offshore don’t roll back research domestically.

“More expansion abroad means more expansion in the United States,” Slaughter said.

Slaughter also insisted that the sort of rules Camp proposed would make it more likely that multinational companies would seek to set up their legal address offshore, under the sort of deals known as tax inversions that were a hot topic on Capitol Hill in 2014.

If intangible property faced higher taxes, U.S. companies would be more willing to seek refuge abroad, Slaughter argued. And while the TIE Coalition does want the kind of territorial tax system that Camp proposed, it believes there are other ways to pay that transition than slapping a tax that targets intangible property.

Those arguments all help to illustrate another of the challenges facing tax reform — which, despite the interest from both the White House and leaders if both parties, is viewed as a long shot on Capitol Hill.

Top Republicans and Democrats have also insisted that the U.S. needs to do more to spur hiring in the tech sector and other innovative industries. But those sectors are also more likely to pay effective tax rates far lower than the top corporate rate of 35 percent, in part because of how intangible property is taxed. That means those companies are also at risk of being some of the losers in a tax reform deal that lowers corporate rates while getting rid of tax incentives.

A Senate Subcommittee on Investigations, for instance, called out Microsoft in 2012 for selling intellectual property developed in the U.S. to subsidiaries in lower-tax jurisdictions to reduce its tax burden. Amgen, a pharmaceutical giant, said last year that it expected its effective tax rate to be around 15 percent, in part because of tax breaks for producing drugs in Puerto Rico.