House Ways and Means Committee members Charles Boustany, R-La., and Richard Neal, D-Mass., have released a bipartisan proposal to create a so-called “innovation box,” a lower tax rate on income derived from intellectual property to encourage more multinational companies to keep intangible assets in the U.S.

The proposal is contained in a discussion draft of the legislation, known as the Innovation Promotion Act of 2015, aimed at sparking a discussion on how to attract and retain research and development investment and intellectual property in the United States. Innovation boxes, also known as patent boxes, have been used in a number of European countries, including Belgium, Ireland, Italy, Hungary, Luxembourg, the Netherlands, Spain, the United Kingdom, as well as China, with tax rates ranging from 5 to 14 percent to encourage companies to develop and keep their intellectual property there. The tax strategy has been widely used, particularly by technology companies, despite moves in recent years to crack down on profit shifting by multinational corporations.

Boustany and Neal are seeking detailed feedback by asking a number of questions about their proposal and expect to include an updated version in the broader international tax legislation that the Ways and Means Committee is pursuing this fall. They argue the proposal will discourage foreign takeovers of American companies and keep jobs in the United States. They pointed out that the U.S. has the highest marginal corporate tax rate in the developed world and is one of the few that taxes income earned abroad.

They noted that U.S.-based multinational corporations are under increasing pressure to move more innovative development and production activities offshore. Adding an innovation box approach to the tax code could incentivize U.S. companies to avoid tax inversions through acquisitions by foreign competitors, while providing a lower effective tax rate for most corporations across many industries. That could encourage greater investment in R&D in the U.S. and attract R&D jobs back to the U.S. from abroad.

“When American innovators compete, we win,” Boustany said in a statement. “Today, our tax code has erected barriers for innovators, forcing them to move overseas to create these exciting new products that are changing the way we live and work every day. We want that activity here in the United States. Congressman Neal and I have released bipartisan draft legislation to begin the conversation on how the United States can attract and retain the brightest minds and best ideas on Earth.”

The discussion draft defines “Qualified Intellectual Property” as patents, inventions, formulas, processes, designs, patterns and knowhow (and property produced using such IP), as well as other types of IP like computer software. The formula takes qualified IP gross receipts minus cost of goods sold and expenses, and multiplies it by the fraction of a company’s budget spent on U.S. R&D, which results in the “Innovation Box Profit.” That amount is subject to a tax rate of 10 percent, as compared to the current maximum corporate tax rate of 35 percent.

In addition, under current law, repatriation of appreciated IP by a foreign subsidiary of a U.S. company is a taxable event. Under the Boustany-Neal innovation box discussion draft, companies with overseas IP would be permitted to bring it back to the U.S. in a non-taxable event, safeguarding IP profits from being taxed by foreign jurisdictions.

“America leads the world in innovation and R&D,” said Neal. “In fact, Kendall Square in Cambridge is home to the highest concentration of R&D in the world. However, our grip on this title is slipping. One of the main culprits is our broken and outdated tax code, which remains a rotary phone in a smart phone world. To continue our leadership around the globe, we must be doing much more to incentivize companies to locate in America, and create jobs in America. The legislation that Dr. Boustany and I have put forward is that commonsense, pro-growth initiative that will attract innovation and the high-paying, high-quality jobs that come with it.”

House Ways and Means Committee Chairman Paul Ryan, R-Wis., welcomed the proposal from his fellow members of the tax-writing committee. "We have to fix our entire tax code—top to bottom,” he said in a statement. “But if we don't act soon to keep American businesses here at home, that challenge is going to be much harder. Foreign competitors are taking over U.S. companies at an alarming rate, and international pressures are only going to make the problem worse in the coming months. The proposal from Reps. Boustany and Neal can help us stem the tide and protect good American jobs. It will also help ensure the United States continues to be the world's leader in innovation. Their plan would allow American businesses to better compete with foreign companies and keep their research and development facilities here in the U.S. This is just one piece of international tax reform, but it's an important one. I applaud Charles and Richie for their work, and look forward to refining the proposal as we move forward on a broader plan to make America more competitive and promote high-paying jobs.”

The discussion draft, feedback request, section-by-section summary of the proposal, a technical explanation of how it would work, and an explanation of why it’s needed are available online.

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