Law360 Quotes Jonathan Brenner and Peter Barnes: Federal Tax Overhaul Could Keep Homegrown IP in the U.S.

Companies developing the next generation of valuable IP have less of a reason now to consider long-term tax planning to push intangible assets such as intellectual property outside the U.S., especially given the incentives included in the 2017 Tax Cuts and Jobs Act.

. . .

In theory, the law could create an incentive for the companies that have planted their IP in jurisdictions such as Ireland or Bermuda to bring it home, free from cost-sharing payments, compliance burdens as well as headaches about negative headlines or enforcement from tax-hungry foreign jurisdictions.

But in practice, the reasons to stay put or wait and see tend to outweigh those incentives. Even though the law has been in place for 15 months and Treasury is well on its way to finalizing the international regulations, taxpayers remain unsure of how it will end up working — and whether it is politically stable.

“People are still getting their arms around what these mean. It would be reckless [to] just go jumping out and doing things based on the new law, so quickly,” said Jonathan Brenner of Caplin & Drysdale in New York.

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The consequences for making the wrong decision could be high.

“To unwind a cost-sharing arrangement and bring IP back to the U.S., it's a once-in-a-lifetime decision,” said [a tax practitioner]. “And it's kind of irreversible.”

This is true for established companies developing their next line of products as well.

“Even if it’s new, it’s probably built on a huge reservoir of existing IP,” said Peter Barnes, a professor of tax at Duke University School of Law and former senior international tax counsel at General Electric Co. “So you can’t realistically say, ‘This is a new piece of IP I’m going to own somewhere else.’ Eighty or 90 percent is existing IP already owned. To suddenly try to move it would raise enormous questions.” [Mr. Barnes is also Of Counsel to Caplin & Drysdale.]

Most practitioners say it’s too early to see how the TCJA will affect younger companies without those pre-existing structures. But the conditions are likelier to push those companies to keep things onshore.

“I do think the new FDII rules make it more comfortable for that truly new company to own it in the U.S.,” Barnes said.

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Excerpt taken from the article “Fed. Tax Overhaul Could Keep Homegrown IP In The US” by Alex M. Parker for Law360.