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The Effect of Taxes on Royalties and the Migration of Intangible Assets Abroad

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  • John H. Mutti
  • Harry Grubert

Abstract

Migration of intangible assets from the United States to foreign countries has become easier due to the ability of U.S. firms to create hybrid entities in their affiliates abroad and to reach favorable cost sharing agreements with them. This strategy was particularly encouraged by the U.S. adoption of "check-the-box" regulations in 1997. Rather than receive royalties from affiliates abroad, US parent firms have an incentive to retain abroad in low-tax countries a greater share of the return to their US R&D. Evidence from several sources for years that span the 1997 policy change indicate a significant response by US corporations in utilizing this strategy. BEA data indicate affiliate earnings and profits grew more rapidly than royalty payments to US parents. Payments to U.S. parents for technical services rose even faster, as would be called for under cost sharing agreements. Regression analysis of affiliate data shows that parent R&D was a more important determinant of royalty payments to U.S. parents than it was for affiliate earnings and profits in 1996, but by 2002 it played a larger role in earnings and profits than in royalties. Cost sharing payments from affiliates in Ireland and from pure tax havens (Bermuda, the Cayman Islands, and Luxembourg) are particularly significant, both economically and statistically.

Suggested Citation

  • John H. Mutti & Harry Grubert, 2007. "The Effect of Taxes on Royalties and the Migration of Intangible Assets Abroad," NBER Working Papers 13248, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13248 Note: ITI PE
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    References listed on IDEAS

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    1. Bloom, Nick & Griffith, Rachel & Van Reenen, John, 2002. "Do R&D tax credits work? Evidence from a panel of countries 1979-1997," Journal of Public Economics, Elsevier, vol. 85(1), pages 1-31, July.
    2. Rosanne Altshuler & Harry Grubert & T. Scott Newlon, 2000. "Has U.S. Investment Abroad Become More Sensitive to Tax Rates?," NBER Chapters,in: International Taxation and Multinational Activity, pages 9-38 National Bureau of Economic Research, Inc.
    3. Robert E. Baldwin & Robert E. Lipsey & J. David Richards, 1998. "Geography and Ownership as Bases for Economic Accounting," NBER Books, National Bureau of Economic Research, Inc, number bald98-1, January.
    4. John Mutti & Harry Grubert, 1998. "The Significance of International Tax Rules for Sourcing Income: The Relationship between Income Taxes and Trade Taxes," NBER Chapters,in: Geography and Ownership as Bases for Economic Accounting, pages 259-284 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Dischinger, Matthias & Riedel, Nadine, 2011. "Corporate taxes and the location of intangible assets within multinational firms," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 691-707, August.
    2. Sarah Clifford, 2017. "Taxing multinationals beyond borders: financial and locational responses to CFC rules," EPRU Working Paper Series 17-02, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    3. Griffith, Rachel & Miller, Helen & O'Connell, Martin, 2011. "Corporate taxes and the location of intellectual property," CEPR Discussion Papers 8424, C.E.P.R. Discussion Papers.
    4. Atif Mian & Amir Sufi, 2011. "Consumers and the economy, part II: Household debt and the weak U.S. recovery," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jan18.
    5. Kevin S. Markle & Douglas Shackelford, 2009. "Do Multinationals or Domestic Firms Face Higher Effective Tax Rates?," NBER Working Papers 15091, National Bureau of Economic Research, Inc.
    6. Markle, Kevin S. & Shackelford, Douglas A., 2012. "Cross-Country Comparisons of Corporate Income Taxes," National Tax Journal, National Tax Association, vol. 65(3), pages 493-527, September.

    More about this item

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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