Paul Organ (U.S. Treasury Department; Google Scholar) presents The Role of Intellectual Property in Tax Planning (with Katarzyna Bilicka (Utah State; Google Scholar) & İrem Güçeri (Oxford; Google Scholar)) at Georgetown today as part of its Tax Law and Public Finance Workshop hosted by Emily Satterthwaite and Dayanand Manoli: 

Multinational enterprises (MNEs) that invest in research and development (R&D) and innovation find it easier to shift profits between their subsidiaries located in jurisdictions with different tax rates. While MNEs invest in R&D and develop intellectual property (IP) across multiple jurisdictions, they can also strategically move profits arising from that IP from high- to low-tax jurisdictions to reduce their overall tax bill. In this paper, we analyze and quantify the importance of two different strategies that MNEs use to move their IP to low-tax jurisdictions: selling a patent developed in a high-tax jurisdiction to a low-tax jurisdiction directly, or signing a cost-sharing arrangement (CSA) between those two jurisdictions to cover the costs of developing further IP. Combining administrative data on CSAs, patent applications and transactions, and US tax returns, we provide novel stylized facts on the use of both those strategies by MNEs. We then show that CSAs increase jurisdiction-level patenting activity, royalty payments, profits, and profitability, especially the CSAs signed with low-tax jurisdictions. 

At the MNE level, a new CSA significantly increases firm sales, profitability, and R&D investment, without affecting the MNE’s effective tax rates. Private firms are the only ones that experience the significant MNE-level effects on sales, profitability, and intangible assets after they sign their first CSA.