by Semiconductor Industry Association
Jason Furman, Chairman of the President’s Council of Economic Advisers, recently stated the Obama Administration believes “…adopting an innovation box would move tax policy in the wrong direction, increasing complexity and cost without a commensurate boost to innovation.” We, however, believe it’s premature to write off the innovation box, which provides a lower tax rate on income related to intellectual property (IP). SIA has supported an innovation box as a component of comprehensive tax reform to make the U.S. tax system more competitive with those in foreign nations.
Both sides of the aisle largely agree the U.S. tax code is ripe for reform. Imposing the highest corporate tax rate in the OECD hurts U.S. operations and exporters. Our archaic system of worldwide taxation at this highest rate with deferral of U.S. tax on earnings of foreign subsidiaries precludes companies from bringing home foreign earnings to invest in U.S. operations. The recent permanent extension of the R&D credit finally provided some certainty to U.S. innovators. The credit, however, was not enhanced from a level that earned the U.S. a global ranking in the bottom half of nations with research incentives.
SIA’s long-standing objectives for U.S. tax reform are: a lower, globally-competitive rate; movement toward a territorial system for the taxation of foreign earnings, and; enhanced incentives for U.S. R&D activities. SIA supported legislation that passed the House last year on a broad, bipartisan vote to significantly enhance and modernize the R&D credit to make the U.S. more competitive in this crucial area of incentivizing innovation.
Unfortunately, the Administration opposed that bill and even now only proposes a modest increase to the R&D credit. In this year’s budget proposal, the Administration proposed an increase only half as large as the bill that passed the House. While we welcome the Administration’s support for an increase in the credit, we don’t think an innovation box should be ruled out in favor of only a relatively small increase to the research credit.
The semiconductor industry generates roughly 80 percent of its sales outside of the U.S., and semiconductors are America’s third-largest manufactured export. Governments around the world offer incentives for attracting to their jurisdictions wafer fabrication, assembly and test or R&D facilities. These incentives include full or partial “tax holidays” and other benefits such as loans and reduced utility costs. Over time, a package of these incentives usually results in a substantial cost advantage for an operation, compared to a similar operation without such incentives.
Policymakers must come to terms with the fact that the U.S. is far from having a globally competitive tax system, and making the U.S. system globally competitive is unlikely to occur with an either/or choice between a modestly improved R&D credit and an innovation box. Intellectual property is the foundation of the innovation economy and the global competitiveness of the U.S. semiconductor industry. IP is, however, highly mobile and the U.S. must consider proposals such as an innovation box to prevent erosion of the U.S. tax base and the flight of IP (and the jobs that go with it) to more competitive nations.
Other nations are not sitting still. France, the Netherlands, the United Kingdom, and many other European countries have already implemented an innovation box. The U.K. rate is 10 percent on IP income, while others in Europe range from 5 to 15 percent. All are significantly lower than both the U.S. statutory rate and average effective rate. This alone creates momentum to move IP to one of these jurisdictions to access the preferential rate – at a minimum, the U.S. loses revenue. The OECD, however, has recommended that only IP developed in a jurisdiction should qualify for the innovation box rate. This magnifies the harm to the U.S. as companies may choose to move research operations (and the associated jobs) to an innovation-box country to ensure profits from that research qualify for the much lower tax rate.
U.S. tax reform is urgently needed to ensure U.S. incentives for innovation and research are competitive in the global economy. Significant amounts of IP-related tax revenue, America’s global technological leadership, and thousands of high-paying U.S. research jobs depend on it. We should not take options off the table when we urgently need to identify ways to close our enormous competitive deficit in the arena of corporate tax policy.
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