Patent Baristas

Forbes recently ran an article showing that companies that generate revenue from products protected by copyrights or patents are vital to the U.S. economy. In a report, NBC Universal Chief Executive Bob Wright released the results of the study he commissioned, which shows that digital piracy, if not reined in, could cause the U.S. economy to stall.

The study, conducted by Washington, D.C.-based Economists Incorporated, found that U.S. intellectual property-oriented industries–from software firms to aerospace and pharmaceutical companies–are vital to the U.S. economy for the following five reasons:

• They contribute nearly 40% of the growth achieved by all U.S. private industry and nearly 60% of the growth of U.S. exportable products and services.
• Ten-year gross domestic product estimates would be about 30% lower than current projections without the contributions of these industries.
• These industries are responsible for 20% of the total U.S. private-industry contribution to gross domestic product, and 40% of the contribution of U.S. exportable products to gross domestic product.
• These industries are among the nation’s highest-paying employers, with 18 million workers earning 40% more than all U.S. workers.
• The core copyright industries, such as music and filmed entertainment, in 2003 contributed $33 billion in net export revenue, while the patent-dependent aerospace industry reported another $32 billion in export revenue during the same period.

The report shows that the protection of intellectual property is critical to the economy and that it’s not just these companies who are benefiting.

Note, however, that the profits on all that intellectual property may not be staying in the U.S. As reported this week in the Wall Street Journal, many high-tech, intellectual property-driven companies have set up tax-shielding subsidiaries in Ireland to get out of paying taxes here at home.

One such subsidiary of Microsoft Corp. helps cut at least $500 million off U.S. taxes. The subsidiary, called Round Island One, provides a structure for Microsoft to reduce its corporate taxes in the U.S. as well as much of Europe. U.S. companies whose products are heavily based on their innovations, such as technology and pharmaceutical firms, are setting up units in Ireland that route intellectual property and its financial gains to the low-tax location — at the expense of the U.S. Treasury.

Much of the of the subsidiaries’ income is licensing fees from intellectual property, e.g., copyrighted software code that originates in the U.S. Some of the rights to these lucrative assets end up in Ireland via complex accounting rules on intellectual property that the Treasury is now seeking to overhaul.

Microsoft’s effective world-wide tax rate plunged to 26 percent in its last fiscal year from 33 percent the year before. Nearly half of the drop was due to “foreign earnings taxed at lower rates,” Microsoft told the Securities and Exchange Commission in an August filing. Microsoft leaves much of its profit in Ireland, including $4.1 billion in cash, avoiding U.S. corporate income taxes.

A common device is to take successful, patented American ideas and then develop new generations of them — with help from an offshore research division. The ownership of the new version (and profits on licensing it) can then legally be shared between the U.S. parent company and the offshore unit.

U.S. law explicitly permits this practice. The controversy comes in valuing the contribution made by the offshore unit. Did it pay a fair share of the development cost? And did it pay a reasonable price to the parent company to be able to share the rights to the original invention, i.e., a price an arm’s-length party would pay?

The concern, of course, is that companies rely on the U.S. education system and other tax-supported infrastructure to produce a creative work force, and then move the fruits of that labor abroad without paying their dues.

More here.