Germany’s IP Tax Law Uses American Businesses as a Piggy Bank

Earlier this month, I led a letter joined by seven of my colleagues to Treasury Secretary Janet Yellen raising our concerns about an extraterritorial tax Germany is imposing on American companies.

As we explained in the letter, Section 49 of the German tax code imposes a withholding tax on royalty payments for patents and trademarks registered in Germany. Pursuant to a very old, previously dormant German tax law, mere registration of intellectual property in Germany prompted the assessment of these taxes.

This tax clearly goes against longstanding international tax norms. Generally, tax jurisdiction over income generated from intellectual property is determined according to the location of certain functions and economic risks, both of which are absent in the case of simple IP registration.

The German government had recognized some of the problems of this nearly 100-year-old tax when it repealed portions of it at the end of 2022. However, the tax was retained for related party transactions. The effect is to continue to subject US multinationals to the withholding tax while excluding German companies. Further exacerbating the problem, the tax is inflated through a calculation that ignores generally accepted valuation principles known as transfer pricing.

The circumstances of this case are concerning, but we shouldn’t confuse the forest for the trees. This instance follows a pattern of extraterritorial taxation on American companies.

First, countries around the world began to apply digital services taxes, explicitly targeting successful US technology firms. As these foreign taxes have proliferated since 2019, they’ve consistently been opposed by both Republicans and Democrats. Now, countries are beginning to enact legislation to implement the undertaxed profits rule as part of Pillar Two’s base erosion and profit shifting initiative at the OECD.

The UTPR will allow foreign governments to impose a tax on an American company’s US profits, and the rules are drafted in such a way as to put US firms at a significant disadvantage. The benefits of US credits such as the R&D tax credit and the low-income housing tax credits are now neutralized by offsetting foreign taxes, while the same credits of our European counterparts are preserved.

Following these actions, it’s hard not to see that much of the world views America’s companies as their piggy bank, and my colleagues and I won’t stand by and allow this trend to continue at the expense of taxpayers.

Last month, Republicans on the House Ways and Means Committee introduced defensive countermeasures to the UTPR and other discriminatory taxes, to reciprocate with higher taxes on the companies based in countries that implement taxes designed to target American companies at the expense of the US Treasury.

America has a substantial portion of the world’s multinational firms. Of the Forbes Global 500, 124 are American companies. That’s on par with our share of global GDP—about 25% of the world’s total. However, the income of American companies is an even higher percentage.

For those companies targeted by Pillar Two, US companies earn nearly 40% of the income of all in-scope companies. Both measures far exceed our share of the global population and are a testament to American economic dynamism.

The success of the American economy is indeed a marvel to behold, but we won’t allow the conditions that enabled that success to be eroded by foreign tax agencies seeking a revenue boost. Germany’s application of Section 49 appears to be the latest iteration of Europe’s desire to target US firms for additional taxes, and we intend to remain vigilant on this and any other application of extraterritorial taxes.

This op-ed was originally published in Bloomberg Tax on June 20, 2023.