Ryan Dudley, partner in charge of the International Tax practice, was quoted in Compliance Week in an article titled, “Unpacking the Reporting Challenge in Patent Boxes.” Here’s an excerpt from the article where Ryan discusses transfer pricing rules and tax liability.
Tax payments are another concern. “The IRS is heavily focused on companies shifting intangible property offshore,” Dudley says. A company that aggressively strips profits from other areas of its business to take advantage of a patent box overseas likely will raise red flags, he says. If the intangible property is held through a foreign subsidiary and used to generate passive—rather than active—income, a U.S. parent company still may still be subject to U.S. tax on the income as it’s derived, Dudley says. This could be the case with, say, a book or film, as well as with products under licensing agreements, such as drug formulas or software. Most organizations transferring existing intangible property into a patent box likely would do so through a sale to a subsidiary, Dudley says. The United States and many other advanced countries have comprehensive transfer pricing rules that require the sale to occur at an arm’s length price. That can lead to a gain against the book value of the property and can result in a substantial tax liability.
To read the full article, visit Compliance Week’s website by clicking here.