Paul L. Caron

Thursday, November 14, 2013

Blair-Stanek Presents IP as a New Front in the Tax Avoidance Battle at North Carolina

Blair-Stanek (2013)Andrew Blair-Stanek (Maryland) presents IP Law as a New Front to Battle Tax Avoidance at North Carolina today as part of its Faculty Speaker Series hosted by Kathleen DeLaney Thomas:

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 an artificially 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 brings a suit alleging infringement of the patent. This Article argues that the defendant in that suit should be able to admit the artificially low sales 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 infringement. Third, even if the court does find the patent valid and infringed, the low price should weigh towards lower 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 the defendant’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, but which give creative professionals the greatest opportunities to flourish).


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My first question would be, what dollar amount would be considered a "high" price? The line matters here. My second question would be, does that mean I just sell it when it's a patent application instead of a patent? With a captive subsidiary, the timing of the sale normally doesn't matter, but isn't a huge cost by itself. Otherwise, you've covered it well, air65cav.

Posted by: NotMyRealName | Nov 19, 2013 7:02:25 AM

First, a low price does not indicate that the patent is bogus. Many (most) patents are low value. The patent might be incredibly unique but without a major economic value.
Second, professor please explain how a low price equates to a narrow scope. Other than that’s what you would like to assert.
Third, I have examined patent cases, and they generally look to lost INCOME to determine the amount of damages. Whether the cost of developing or purchasing the patent was high or low does not determine the value of the patent. Its potential to produce income determines the value.
Fourth. Once again the author confuses price and value. The fact that I spent $1 billion to produce a patent does not make the patent worth $1 billion. Look at Big Pharma which can make much more or Pharma can spend that much and never have the drug approved for use. Stay after class and write on the blackboard one 100 times – cost does not equal value.
Fifth. The professor seems to think there is a public policy against minimizing taxes legally. If I say Judge Learned Hand, what tax quote springs to mind?
Much of the above is magical thinking – it is just not grounded in any reality that I live in.
Finally the author states “As a hypothetical example, suppose that Apple Inc. sells the patent rights on a brand-new invention for an artificially low price to a subsidiary in a tax haven like Ireland.” I don’t think any transaction goes like that. IRC section 367(d) requires that IP be sold for the equivalent of an annual arm’s length royalty – which would bar the author’s hypothetical.
A more real world hypothetical would be that Apple provides Ireland with $1 billion to invest in its next great idea and then Ireland owns the patent. If the next great idea is a bust, then Apple gets a billion dollar write off at 12.5% rather than at 40%.
I am not arguing that there should not be reform. But how much attention do you pay to someone whose patent arguments are shaky and who’s hypothetical is not what happens? Tax professors should think about why tax professionals do not read this type of paper.

Posted by: air65cav | Nov 14, 2013 1:37:24 PM