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Outside the Box: Any R&D tax break for multinationals in the lame-duck session should come with strings attached


Right now, Congress is moving like a rummage sale. That’s because the current lame-duck session is racing to complete a potential $100 billion package of tax cuts. On the line are the usual trade-offs—Democrats seeking expanded child tax credits and Republicans pushing for private-sector tax breaks.

However, both sides should stand firm against rubber-stamping the same old research and development (R&D) tax breaks for multinational corporations.

Expensing of R&D costs

The U.S. tax code allows for corporate tax deductions of R&D costs. That’s sensible. But the issue facing Congress is what R&D deductions it should grant to multinational corporations. This should be a no-brainer, though, since granting multinationals a special tax break for R&D might yield little or no benefit to the American people. And so, lawmakers should establish a few guardrails—to ensure that the U.S. economy gains something in return.

“ If they request a special tax benefit from the U.S., they should provide something in return. ”

The issue for multinationals is that, right now, they want the ability to deduct R&D costs from the year in which their money was spent. They would much prefer to continue this benefit as an all-at-once, money-in-their pocket reimbursement—rather than spread out the expensing over time.

Desperate to regain this special R&D expensing in the end-of-year tax bill, multinationals are now warning that changes in their tax status could pose a threat to the U.S. economy. But that’s laughable. Congress currently has no guarantee that any of the tax breaks awarded to multinationals for their corporate R&D expensing will result in future U.S. intellectual property (IP)—or even new jobs in the U.S.

Israeli example

One path forward would be for Congress to require that R&D expensing means a U.S. company will “own and control” any resulting IP. That would seem simple—and the U.S. economy would stand to gain some benefit beyond funding temporary R&D jobs.

However, there’s a problem: The costs of R&D take place before any resulting IP exists. And it’s often the case that R&D doesn’t actually lead to a new product or service.

Since many R&D expenditures don’t result in new IP, Congress needs to attach these expenses to something tangible. A good example would be Israel’s Law for the Encouragement of Industrial Research and Development. What Israel accomplished demonstrates that a country can indeed establish rules for companies that use government money in their research. Israel mandated that participants in its R&D system could not transfer IP created during the R&D stage beyond the country’s borders; the IP must remain in Israel.

Congress should follow this example—and apply the same rule to any company that chooses to accept R&D expensing under an upfront, take-the-money-now option. Of course, companies don’t have to take this benefit. They could instead spread their costs out over time—and avoid such obligations.

But choosing to use R&D expensing—and get reimbursed immediately through tax credits—would establish some clear parameters. The multinational would be required to connect a domestic U.S. residency “code” for the project in question. That would be a small price to pay for the considerable tax advantages they’re seeking. And if an IP results from the project being expensed, the domestic residency code would mean the U.S. gains a more direct and larger benefit through tax revenue on IP treatment.

Something in return

Even though Congress is attempting to race through the end of their session, it should set meaningful expectations. It’s hard to establish something permanent in a lame-duck. But this would be at least the temporary price for an extension of R&D reimbursing.

If the U.S. grants tax breaks on R&D, isn’t it fair to expect the benefits to flow to the American people? Corporations can always choose to spread their costs out over time for tax purposes. But if they request a special tax benefit from the U.S., they should provide something in return. Requiring American IP residency and control is the most basic quid pro quo that Congress should expect for granting another few years of R&D expensing to multinationals.

David Morse is tax policy director at the Coalition for a Prosperous America Education Fund. Follow him on Twitter @CentristinIdaho.

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