The United States has spent the last decade-plus destroying most of the reasons to create Intellectual Property (IP) in the United States.
This is more than a mite problematic — given we are in the nascent stages of what will increasingly be an Information Economy. Where more and more of what we do will be digital and thus require more and more IP.
The US has three branches of government. All three have been actively attacking IP and its creators.
“Foreign Derived Intangible Income (FDII) is a special category of earnings that come from the sale of products related to intellectual property (IP). If a U.S. company holds IP in the U.S., such as patents or trademarks, and has sales to foreign customers based on that IP, the profits from those sales face a lower tax rate.
“How does FDII work?
“FDII is income from the use of intellectual property, a company’s legally protected, non-physical assets, in the United States in creating an export. FDII is provided a special lower tax rate of 13.125 percent.
“FDII was adopted when the U.S. moved from a worldwide to a territorial system, which changed incentives for tax avoidance and where companies held their IP. FDII is supposed to increase businesses’ incentive to bring and keep IP and the associated profits in the United States.”
Emphasis ours. Because the FDII DOES “increase businesses’ incentive to bring and keep IP and the associated profits in the United States.” Because less taxes means more creativity and productivity. Because human nature. Because duh.
This is obviously great for the US. So of course Biden wants to murder it. And behold the lying irony of what Biden has named his tax proposal.
“The ‘foreign derived intangible income’ (‘FDII’) regime under current law is intended to provide a counterbalance to the GILTI regime by encouraging U.S. multinational groups to keep intellectual property in the United States by providing a lower 13.5% effective tax rate for certain foreign sales and the provision of certain services to unrelated foreign parties in excess of 10% multiplied by the taxpayer’s QBAI.
“The Made in America Tax Plan would repeal the FDII regime in its entirety.”
EXCELLENT news for domestic IP creators. Oh — FDII exists as “a counterbalance to the GILTI regime…?” What’s GILTI?
“(A) category of income that is earned abroad by U.S.-controlled foreign corporations (CFCs) and is subject to special treatment under the U.S. tax code….
“The U.S. tax on GILTI is intended to prevent erosion of the U.S. tax base by discouraging multinational companies from shifting their profits on easily moved assets, such as intellectual property (IP) rights, from the U.S. to foreign jurisdictions with tax rates below U.S. rates.”
FDII exists to offset this GILTI tax. And what does Biden’s woefully misnamed “Made In America” tax plan do to GILTI? Massively increase the tax rate and the scope of its imposition — in three massive ways:
“The effective tax rate on GILTI for corporate taxpayers would increase from 10.5% to 21%, which represents an increase in the effective tax rate on GILTI to 75% of the corporate tax rate (21%/28%, assuming the U.S. federal corporate tax rate is raised to 28%) from 50% of the corporate tax rate under current law (10.5%/21%).
“GILTI would be required to be determined on a country-by-country basis. Accordingly, income earned in low tax-rate countries would become subject to GILTI, whereas under current law, it might be blended with higher-taxed income and either reduce or eliminate GILTI entirely.
“The exclusion equal to 10% of (qualified business asset investment) QBAI would be removed.”
So Biden is DOUBLING the GILTI rate. And removing the floor for its imposition country-to-country. And increasing tenfold the tax’s imposition. From 10% of investment — to 100%.
Remember: The FDII tax incentive exists to keep IP creation in the US. And the FDII tax incentive exists to offset the disincentives of the GILTI tax.
Biden is going to MASSIVELY increase the GILTI tax. AND completely eradicate the off-setting FDII tax incentive.