Friday, October 18, 2013
Andrew Blair-Stanek (Maryland) presents IP Law as a New Front to Battle Tax Avoidance at Florida today as part of its Graduate Tax Program Tax Colloquium:
Multinational corporations use intellectual property (IP) as a vehicle to minimize their taxes on a massive scale. These tax-avoidance strategies rely on multinationals assigning, at some point in time, an artificially low value to their IP. Tax scholars and policymakers have proposed attacking these widespread abuses by changing tax law. This paper proposes an entirely new weapon and entirely new combatants in the battle against these abuses: extending existing IP law so that self-interested defendants in IP suits deter multinationals from undervaluing their IP for tax purposes. This pragmatic approach avoids grand restructuring of tax policy, harmonizes two discrete areas of law, and requires no congressional action.
As a hypothetical example, suppose that Apple Inc. sells the patent rights on a brand-new invention for a low price to a subsidiary in a tax haven like Ireland. This transaction allows Apple to largely avoid paying any tax to any country on the profits from the invention. Suppose Apple then sues a third party, Samsung Electronics, for infringing the patent. This Article argues that Samsung should be able to admit this artificially low price as evidence that hamstrings Apple’s lawsuit in five ways.
First, the low price should be evidence that the patent is invalid. Patent law has long looked to non-technical “secondary considerations” to assess whether the invention was obvious to engineers or scientists in the field. The low sales price indicates that Apple itself thought the invention was not a significant advance. Second, even if the patent is valid, the low price should be evidence that the patent has narrower scope, making it harder to show Samsung’s infringement. Third, even if the court does find the patent valid and infringed, the low price should weigh towards correspondingly low damages. After all, a patent’s price should reflect its profit or licensing potential, and damages reflect lost profits or lost licensing royalties. Fourth, the low price should make it harder for Apple to get preliminary or permanent injunctions against Samsung’s infringement, since the less valuable the patent, the less likely that infringement would cause irreparable harm. Fifth and finally, the court could find “patent misuse” and could decline to provide Apple any remedy until it made the U.S. Treasury whole. Patent misuse is a longstanding doctrine that allows courts to withhold remedies from patentees who use their patents to violate public policy.
Copyright law and trademark law allow for very similar attacks based on artificially low transfer prices. This Article reviews the various justifications for IP law, and finds that using low transfer prices as evidence in IP litigation is consistent with all of them. Indeed, these changes can encourage the flourishing of creative professionals by leveling the playing field between IP-heavy multinationals (which can use these tax tricks but can stifle creativity) and smaller IP-based businesses (which cannot use these tax tricks and offer the greatest opportunities for creativity).