Estimate for 4Q GDP growth in intangible revised again

BEA has released its third (what was formerly called the “final”) estimate of US GDP. And once again there was a large change in the growth rate for intellectual property products (IPP), i.e. research and development; entertainment, literary, and artistic originals; and software. This latest estimate shows a 4.0% growth rate. Last month’s second estimate had an IPP growth rate of 8.0% and the advanced estimate’s growth rate was 3.2%. So the advanced estimate turns out to be closer to the real number. No explanation from BEA as to why the spike in the second estimate. But we really need to understand why the fluke occurred. The IPP data is a new addition to GDP and we need to make sure we get it right.
On the macro side, the third estimate shows a 4th Quarter 2013 growth rate of 2.6%. That is slight revision upward from the second estimate last month of 2.4% but still below the advanced estimate of 3.2%. The growth rate for the 3rd Quarter had been 4.1% – so the economy did slow somewhat at the end of last year. The latest revision is in keeping with economists’ forecast of a 2.7% growth rate.
IPP percent 4Q13 -3rd.png

Wasting Human Capital

Alan Krueger, Judd Cramer and David Cho have written a devastating analysis of the long term unemployment problem Are the Long-Term Unemployed on the Margins of the Labor Market? (full paper available here and the infographics here). As they point out, the long term unemployed are similar to the short term unemployed. But unlike the short term unemployed, a cyclical economic recovery does not lead to lower rates of long term unemployment. The long term unemployed suffer from more structural difficulties than just low labor demand.

Even in good times, the long-term unemployed are on the margins of the labor market, with diminished job prospects and high labor force withdrawal rates. Even after finding another job, reemployment does not fully reset the clock for the long-term unemployed, who are frequently jobless again soon after they gain reemployment. Only 11 percent of those who were long-term unemployed in a given month returned to steady, full-time employment a year later.

As the authors note:

The portrait of the long-term unemployed in the U.S. that emerges here suggests that, to a considerable extent, they are an unlucky subset of the unemployed.

This represents a huge waste of human capital and requires special attention. As the authors conclude:

Overcoming the obstacles that prevent many of the long-term unemployed from finding gainful employment, even in good times, will likely require a concerted effort by policy makers, social organizations, communities and families, in addition to appropriate monetary policy.

One of the findings of the study highlights the problem facing any such concerted efforts. The study notes that:

The subset of the long-term unemployed who do regain employment tend to return to jobs in the same occupations and industries from which they were displaced, suggesting that significant challenges exist for helping the long-term unemployed to transition to growing sectors of the economy.

This is a disturbing finding given that our displaced workers training system is built upon the premise that these worker will easily find work in new areas. It points out that the system is not working very well.
Maybe we need a new approach. Too often it seems that we ask the unemployed to throw away all their formal and tacit knowledge to chase the latest hot occupational trend. We need to recognize the specific skills and intangible asset that displaced worker have, and build upon those assets. Successful companies often build upon one set of knowledge assets to enter adjacent markets. Maybe we should structure our re-training system along the strategy as well.
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As a side note: much of the press cover of the report has been on target. For example, the WSJ ran this summary: “Long-Term Unemployment Calls for Aggressive Policy Response
Of course, there are those who just don’t seem to get it — like this unfortunate headline in the Washington Post “Five reasons why the long-term jobless don’t matter to the economy”.
With thinking like that, no wonder we end up wasting precious human capital.

A call for a new trade and competitiveness act

Yesterday, the Center for American Progress (CAP) released a report on Progressive Pro-Growth Principles for Trade and Competitiveness. According to CAP, any new trade agreement needs to address five key areas: currency manipulation; state-owned and state-supported enterprises; investor-state dispute settlement mechanisms; high-road labor and environmental standards; rules of origin. They also point to the need to strengthen enforcement.
This is a good list which recognizes that “trade” is more that just about the movement of goods and services across borders. It is about harmonizing economic rules (see earlier postings).
The report, however, goes on to talk about what else is needed specifically to address our competitiveness challenges. They call for a bill that ties trade and competitiveness together, as we did in the Omnibus Trade and Competitiveness Act of 1988. Having worked on that bill, I can vouchsafe that the desire/need to give the Administration trade negotiation authority can be a powerful engine to pull a number of other policies along.
The specific proposals for the competitiveness part of the bill include reauthorization of the Export-Import Bank, worker training, investment in infrastructure, and increasing R&D. In addition, the report restates an earlier proposal for a quadrennial National Economic Strategic Assessment. As I’ve commented before, I strongly support this idea. A decade ago, I called for a Commission on the Future of the U.S. Economy to assess our competitiveness and make recommendations. A quadrennial economic assessment would help accomplish the same objective. I would also note that establishment of a quadrennial economic assessment does not need to wait for the passage of legislation. It can be done by executive order.
So while Congress considers CAP’s excellent suggestion of an omnibus trade and competitiveness bill, the President should move ahead with part of that agenda that are already under his control. The quadrennial economic assessment would be a good starting point.

Innovation U 2.0 and the rise of the student entrepreneur

Back in 2002, Lou Tornatzky and colleagues published a report on innovation and research universities, Innovation U. Earlier this month, Tornatzky published an updated version to take into account the changes in the innovation and R&D ecosystem in the past decade. The updated version, Innovation U 2.0: New University Roles in a Knowledge Economy, takes off from the original with an acknowledgement of some of these changes. Many of these changes are relatively obvious to those who have followed technology policy. These include the shifting funding landscape and the growing awareness by state and local officials as to the importance of technology based economic development (TBED).
One change caught my attention: the growth in student entrepreneurship.

In 2001-2002 university innovation programs were mostly focused on faculty research, industry partnering, and enabling faculty licensing. The most notable change in the past decade has been a significant expansion of programs for student entrepreneurship–both curricular expansion (classes, minors and majors) and a co-curricular phenomenon (e.g., centers, accelerators, institutes, pitch contests, clubs, seed funds). Entrepreneurship education is now a significant component in virtually all major universities, and in many smaller institutions as well, and was singled out as a particularly important target of opportunity in a recent report on university-based technology commercialization by the US Department of Commerce. There are simply more students than faculty members in a university who want to do entrepreneurship. Economic dislocations have also led students to seriously consider non-traditional career paths. Entrepreneurship education curricula and co-curricula activities can engage thousands of students and many alumni and have the potential to have an impact on local economies.

Their findings in that regard are significant:

The most robust and most dynamic component of these trends lies in co-curricular and extra-curricular activities that supplement academic courses in entrepreneurship. The majority of schools sponsored incubators and/ or accelerators for student and faculty startups, and most sponsored business plan competitions with sizeable cash awards. A few have established innovation scholar programs, fellowships, university venture and seed funds, and mentoring programs. In terms of the latter, Brigham Young University’s Venture Mentoring Services, and MIT’s Venture Mentoring Service and its national Enterprise Forum network, are impressive practice examples. Some of the more creative support strategies offered to student entrepreneurs include a mandated course for all entering freshmen (ASU), U of U’s BlockU program, special summer programs including high school outreach and sessions for incoming student entrepreneurs, and MIT’s summer “internships” that allow students to be paid as they start their own ventures.
There are several clear advantages in the increased emphasis on co-curricular and extracurricular activities. One is the typically slow process necessary to get a new course, major, minor, or concentration approved. More than one faculty member has viewed curriculum committees as the place where good ideas go to die. In addition, aside from more flexibility in launch, co-curricular programs have an easier time of pulling in different disciplinary perspectives, not unlike research centers or institutes. Third, the evolving consensus in entrepreneurship education is that skills and knowledge are best acquired via “learning-by doing,” as opposed to learning about doing.

There is obviously a lot more in the study — all worth reading about. But for me, this finding is key. The creation and transfer of knowledge — which is the purpose of universities — is an active undertaking. Too often we thing of universities as places where teaching goes on (passive), rather than learning (active). By focusing on the activities of students in the learning process inside and outside of the traditional institutional boundaries, universities can better fulfill their core mission. And thereby better aid in economic growth and prosperity.

January trade in intangibles – and 2013 revisions

In other economic news this morning, the trade deficit in January remained basically the same, according to the BEA — rising to $39.1 billion from December’s $39.0 billion. Exports were up by $1.2 billion but imports were up by $1.3 billion. Economists had expected a deficit of $38.4 to $38.5 billion.
The hidden good news is that the deficit in non-petroleum goods improved, as the chart below shows. The hidden bad news is that the deficit in petroleum goods worsened, due to an increase in imports. Imports of non-petroleum goods actually declined. Had the petroleum goods deficit remained the same, the overall deficit would have improved by almost $3.7 billion.
Our trade surplus in pure intangibles grew slightly in January. Exports of business services grew more than imports of business services and royalty receipts (exports) rose faster than royalty payments (imports).
Our deficit in Advanced Technology continued improved in January, dropping by $1.3 billion to $4.7 billion after a drop of almost $3.3 billion in December. Once again the improvement was due in large part to a $3 billion drop information and communications technology imports – likely a post-Christmas phenomena. Interestingly, imports of life sciences technology increase by almost $600 million in January while both imports and exports of aerospace technology declined.
Advanced Technology goods also represent trade in intangibles. These goods are competitive because their value is based on knowledge and other intangibles. While not a perfect measure, Advanced Technology goods serve as an approximation of our trade in embedded intangibles. Adding the pure and embedded intangibles shows an overall surplus of $11.5 billion in January compared to $9.9 billion in December.
The other part of the story is the revisions to the data for 2013. The new annual data is presented in charts below. The revision increased imports of business services by almost $2.7 billion over the last six months of the year. Exports of business services were also revised upward by $569 over the period while by around $100 million for those months. Royalty receipts (exports) and royalty payments (imports) were also revised slightly downward. The net result is that the surplus in intangibles is about $2.1 billion less than previously reported for those months – due mostly to the revision in business service imports. The revision also change the story about the trend lines slightly. Whereas before December recorded a slight decline in the surplus, the surplus actually grew that month. The reverse was true for September where the original data showed growth in the surplus whereas the revisions show a decline.
Intangibles trade-Jan14.png
Intangibles and goods-Jan14.png
Oil goods intangibles-Jan14.png
Intangibles trade-2013 post Jan revisions.png
Intangibles and goods-2013 post Jan revisions.png

Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:


Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.


Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

February employment

This morning’s job numbers were a little better than expected. Payrolls increased by 175,000 in February while the unemployment rate ticked up slightly to 6.7%. Economists had forecast 149,000 to 152,000 new jobs and an unemployment rate basically unchanged at 6.5% to 6.6%.
Mixed news, however, on involuntary underemployed (part time for economic reasons). The total involuntary underemployed in non-agricultural industries continued to decline by 59,000 in February. The number of workers part time because of slack work again declined. But the number of those who could only find part time work rose. The number of part time for non-economic reasons declined. Involuntary underemployment is still well above pre-Great Recession levels.
Involuntary underemployed February 2014.png
UPDATE: While the number of part-time workers due to slack work actually decline in February, there may have been some increase in slack work above what would have normally occurred due to the snowstorms. See these charts from the Council of Economic Advisers.

FY2015 budget proposal and taxation of intangibles

Yesterday was Shrove Tuesday, also known to much of the world as Fat Tuesday or Mardi Gras. In Washington, it was Budget Day — when the President released his FY 2015 budget proposals. The release, of course, generated a torrent of analysis. (For general comments, see the Wall Street Journal, the New York Times, the Washington Post and these two positive pieces on the relevance of the budget in the New Republic and Politico).
Putting aside all the hype and punditry, I want to focus on one aspect of story for now (I will have more later). As part of budget process, the Treasury Department also releases its General Explanations of the Administration’s Revenue Proposals (aka the “Greenbook”) which looks at the tax side. Much will be said about the larger picture presented by these proposals to change the tax code. I will focus on a few provisions directly relating to intangibles.
As in previous years, the Administration once again proposes to tight up the regulations on the transfer of intangibles. This year’s proposal (below) is a modified version of last year’s proposal and the proposals from FY 2013, FY 2012 and FY 2011 and FY 2010.
As I’ve described before, the proposals go to the issue of companies transferring their intellectual property to subsidiaries located in countries where the royalty income is tax at a low rate or not taxed at all. The parent company “sells” the IP to the subsidiary and then pays royalties to that subsidiary for the use of the IP. The key question is the fair market value of that transfer. US law requires that the transfer be valued at the same level as if it was an arms-length transaction between two independent entities. The parent would then pay US taxes on that income. There is concern that companies are low balling the value of the IP, “selling” it cheaply so as to minimize the amount of US taxes they have to pay on the income from those sales. The US loses in two ways, the tax on the income from the sale and the tax on the income from the royalties.
The proposals go after a couple of issues with transfer pricing. The first proposal deals with imposing a tax on excess income from intangibles transferred to low-taxed affiliates. The second proposal goes to the enforcement powers of the IRS Commissioner under Section 482 to place his/her own value on a transfer whenever “necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.” The proposal would allow the Commissioner to value the intangible on an aggregate basis. This appears to go after the well-know issue that portfolios on intangibles are more valuable than the individual items taken separately. The next issue is related. The proposal would expand the definition to include workforce in place, goodwill and going concern value. Those three intangibles are essentially “whole-enterprise” assets. They cannot be split off from the enterprise. As such, they are generally not transferred from entity to another as individual components like a patent or a trademark could be. Thus, the proposal allows the IRS to value the package rather than the parts. The proposal also goes after the issue of valuation by setting the standard as “taking into consideration the prices or profits that the controlled taxpayer could have realized by choosing a realistic alternative.”
The proposals also include a provision to simplify the treatment of intangibles by repealing certain anti-churning provisions, which was first proposed last year.
Whereas the previous proposals focus on the transfer of intangible assets, the new proposal seeks to deal with the income generated from sale of digital goods and services. It would included some of that income as part of a “foreign base company income” and therefore subject to certain taxation.
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TAX CURRENTLY EXCESS RETURNS ASSOCIATED WITH TRANSFERS OF INTANGIBLES OFFSHORE
Current Law
Section 482 authorizes the Secretary to distribute, apportion, or allocate gross income, deductions, credits, and other allowances between or among two or more organizations, trades, or businesses under common ownership or control whenever “necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.” The regulations under section 482 provide that the standard to be applied is that of unrelated persons dealing at arm’s length. In the case of transfers of intangible assets, section 482 further provides that the income with respect to the transaction must be commensurate with the income attributable to the transferred intangible assets.
In general, the subpart F rules (sections 951-964) require U.S. shareholders with a 10- percent or greater interest in a controlled foreign corporation (CFC) to include currently in income for U.S. tax purposes their pro rata share of certain income of the CFC (referred to as “subpart F income”), without regard to whether the income is actually distributed to the shareholders. A CFC generally is defined as any foreign corporation if U.S. persons own (directly, indirectly, or constructively) more than 50 percent of the corporation’s stock (measured by vote or value), taking into account only those U.S. persons that own at least 10 percent of the corporation’s voting stock.
Subpart F income consists of foreign base company income, insurance income, and certain income relating to international boycotts and other proscribed activities. Foreign base company income consists of foreign personal holding company income (which includes passive income such as dividends, interest, rents, royalties, and annuities) and other categories of income from business operations, including foreign base company sales income, foreign base company services income, and foreign base company oil-related income.
A foreign tax credit is generally available for foreign income taxes paid by a CFC to the extent that the CFC’s income is taxed to a U.S. shareholder under subpart F, subject to the limitations set forth in section 904.
Reasons for Change
The potential tax savings from transactions between related parties, especially with regard to transfers of intangible assets to low-taxed affiliates, puts significant pressure on the enforcement and effective application of transfer pricing rules. There is evidence indicating that income shifting through transfers of intangibles to low-taxed affiliates has resulted in a significant erosion of the U.S. tax base. Expanding subpart F to include excess income from intangibles transferred to low-taxed affiliates will reduce the incentive for taxpayers to engage in these transactions.
Proposal
The proposal would provide that if a U.S. person transfers (directly or indirectly) an intangible asset from the United States to a related CFC (a “covered intangible”), then certain excess income from transactions connected with or benefitting from the covered intangible would be treated as subpart F income if the income is subject to a low foreign effective tax rate. In the case of an effective tax rate of 10 percent or less, the proposal would treat all excess income as subpart F income, and would then phase out ratably for effective tax rates of 10 to 15 percent. For this purpose, excess intangible income would be defined as the excess of gross income from transactions connected with or benefitting from such covered intangible over the costs (excluding interest and taxes) properly allocated and apportioned to this income increased by a percentage mark-up. For purposes of this proposal, the transfer of an intangible includes by sale, lease, license, or through any shared risk or development agreement (including any cost sharing arrangement)). This subpart F income will be a separate category of income for purposes of determining the taxpayer’s foreign tax credit limitation under section 904.
The proposal would be effective for transactions in taxable years beginning after December 31, 2014.
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LIMIT SHIFTING OF INCOME THROUGH INTANGIBLE PROPERTY TRANSFERS
Current Law
The Secretary may distribute, apportion, or allocate gross income, deductions, credits, and other allowances between or among two or more organizations, trades, or businesses under common ownership or control whenever “necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses” (section 482). In the case of transfers of intangible property (as defined in section 936(h)(3)(B)), section 482 also provides that the income with respect to the transaction must be commensurate with the income attributable to the transferred intangible property. Further, under section 367(d), if a U.S. person transfers intangible property (as defined in section 936(h)(3)(B)) to a foreign corporation in a transaction that would otherwise be tax-free under section 351 or section 361, the U.S. person is treated as (i) having sold such property in exchange for payments which are contingent upon the productivity, use, or disposition of the property, and (ii) receiving amounts which reasonably reflect the amounts which would have been received annually in the form of such payments over the useful life of the property, or, in the case of a disposition following such transfer, at the time of the disposition. The amounts taken into account shall be commensurate with the income attributable to the intangible. Finally, under the regulations issued pursuant to section 367(e)(2), if a U.S. subsidiary corporation transfers intangible property (as defined in section 936(h)(3)(B)) to a foreign parent corporation in an otherwise tax-free liquidation described in section 332, the U.S. subsidiary must recognize gain upon the distribution of such property.
Reasons for Change
Controversy often arises concerning the value of intangible property transferred between related persons and the scope of the intangible property subject to sections 482 and 367. This lack of clarity may result in the inappropriate avoidance of U.S. tax and misuse of the rules applicable to transfers of intangible property to foreign persons.
Proposal
The proposal would provide that the definition of intangible property under section 936(h)(3)(B) (and therefore for purposes of sections 367 and 482) also includes workforce in place, goodwill, and going concern value, and any other item owned or controlled by a taxpayer that is not a tangible or financial asset and that has substantial value independent of the services of any individual. The proposal also would clarify that where multiple intangible properties are transferred, or where intangible property is transferred with other property or services, the Commissioner may value the properties or services on an aggregate basis where that achieves a more reliable result. In addition, the proposal would clarify that the Commissioner may value intangible property taking into consideration the prices or profits that the controlled taxpayer could have realized by choosing a realistic alternative to the controlled transaction undertaken.
The proposal would be effective for taxable years beginning after December 31, 2014. No inference is intended regarding the scope of intangible property included in section 936(h)(3)(B) under current law.

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REPEAL ANTI-CHURNING RULES OF SECTION 197 OF THE INTERNAL REVENUE CODE
Current Law
In 1993, Congress enacted section 197 of the Internal Revenue Code to allow the amortization of
certain intangibles (such as goodwill and going concern value). Prior to the enactment of section
197, such intangibles were not amortizable. To “prevent taxpayers from converting existing
goodwill, going concern value, or any other section 197 intangible for which a depreciation or
amortization deduction would not have been allowable under [prior] law into amortizable
property,” Congress enacted section 197(f)(9), which excludes an intangible from the definition
of amortizable section 197 intangible if (1) the intangible was held or used at any time on or after
July 25, 1991, and on or before August 10, 1993 (the “transition period”), by the taxpayer or
related person; (2) the taxpayer acquired the intangible from a person who held it at any time
during the transition period, and, as part of the transaction, the user of the intangible does not
change; or (3) the taxpayer grants the right to use the intangible to a person (or a person related
to that person) who held or used the intangible at any time during the transition period.
Reasons for Change
The rules under section 197(f)(9) are complex. Because it has been almost 20 years since the
enactment of section 197, most of the intangibles that exist today did not exist during the
transition period and, thus, would not be subject to section 197(f)(9). Even though the number of
intangibles subject to section 197(f)(9) may be minor, taxpayers must nevertheless engage in due
diligence to determine whether such intangibles exist and then navigate the complex rules of
section 197(f)(9). Accordingly, the complexity and administrative burden associated with
section 197(f)(9) outweighs the current need for the provision.
Proposal
The proposal would repeal section 197(f)(9) effective for acquisitions after December 31, 2013.

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CREATE A NEW CATEGORY OF SUBPART F INCOME FOR TRANSACTIONS INVOLVING DIGITAL GOODS OR SERVICES
Current Law
Internal Revenue Code (Code) sections 952 and 954 describe certain categories of income that, when earned by a controlled foreign corporation (CFC), are currently included in the income of United States shareholders of that CFC as subpart F income under Code section 951. These categories include “foreign base company income”, which includes foreign personal holding company income, foreign base company sales income, and foreign base company services income. Foreign personal holding company income generally includes rents and royalties other than those derived in the active conduct of a trade or business and received from a person other than a related person. Foreign base company sales income generally includes income earned in connection with a purchase and subsequent sale of personal property where such property is purchased from (or on behalf of), or sold to (or on behalf of), a related person, provided the property is manufactured outside of the CFC’s country of organization and sold for use or consumption outside that country. Foreign base company services income generally includes income earned in connection with the performance of certain services performed outside of the CFC’s country of organization for or on behalf of a related person. All these categories of subpart F income are intended to ensure that tax is not deferred on income that is not generated by an active trade or business of the CFC.
Digital transactions involving copyrighted articles can take the form of leases, sales, or services. For example, a transaction involving a transfer of a computer program (i.e., a copyrighted article) could be characterized as a sale or lease of the computer program, depending on the facts and circumstances concerning the benefits and burdens of ownership with respect to the computer program. A computer program hosted on a server also might be used in a transaction characterized as the provision of a service to a user who accesses the server from a remote location.
Reasons for Change
The existing categories of subpart F income do not adequately address mobile income earned from providing digital goods and services. By choosing different forms for substantially similar transactions involving digital goods and services (leases, sales, or services), taxpayers may be able to avoid the application of the existing subpart F rules. In this regard, the subpart F rules, which are generally intended to require current U.S. taxation of passive and highly mobile income, have not kept pace with advances in technology. This shortcoming enables CFCs to shift income related to digital goods and services to low-tax jurisdictions, in many cases eroding the U.S. tax base. For example, a CFC may be able to conduct business with remotely-located customers through the “cloud” using intangible property acquired from a related party and without conducting any substantial business activities of its own.
Proposal
The proposal would create a new category of subpart F income, foreign base company digital income, which generally would include income of a CFC from the lease or sale of a digital copyrighted article or from the provision of a digital service, in cases where the CFC uses intangible property developed by a related party (including property developed pursuant to a cost sharing arrangement) to produce the income and the CFC does not, through its own employees, make a substantial contribution to the development of the property or services that give rise to the income. An exception would apply where the CFC earns income directly from customers located in the CFC’s country of incorporation that use or consume the digital copyrighted article or digital service in such country.
The proposal would be effective for taxable years beginning after December 31, 2014.

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Our previous report, Intangible Asset Monetization: The Promise and the Reality, pointed out that taxation is an important policy tool that has not yet fully come to grips with the rise of importance of intangibles assets. For example, we have long advocated the expansion of the R&D tax credit into a knowledge tax credit by incorporating tax incentives for investments human capital as well as research. As part of a review of the intangibles and taxation, we suggest that it might be time to “explore lowering the tax rate on intangible asset royalties, in conjunction with stricter regulations on international transfer-pricing mechanisms and cost-sharing arrangements and on passive investment companies.” The report goes on to say:

Providing a more direct tax incentive to the licensing of intangibles by lowering the rate on intangible asset royalties, such as to the capital gains rate, is a more controversial proposal. This lower rate could be crafted to apply only to royalties for new licenses for a limited time, such as a sliding scale for three years. In crafting such an incentive, safeguards would need to be established to prevent the incentive from being used for simply transferring existing licenses to SPEs [special purpose entities] and to ensure that the incentive went to new licensing activities only.

As I’ve noted before, we have yet to have that discussion in any of the previous years when the Administration made its proposals. Maybe this year will be different. At a minimum, I suspect that the new proposal on taxation of digital goods and services will attract attention.