Conference Agenda

More innovative multinational enterprises (MNEs) find it easier to shift profits between their subsidiaries located in jurisdictions with different tax rates. While MNEs invest in R\&D and develop IP across multiple jurisdictions, they can 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 between those two jurisdictions to cover the costs of developing further IP. Combining information on CSAs, patent applications and transactions, and tax payments of US MNEs using US tax returns data and Orbis Global IP data, we provide novel descriptive evidence on the use of both those strategies by MNEs.

The Tax Cuts and Jobs Act unlocked as much as $1.7 trillion of U.S. multinationals' foreign cash. We examine the real and financial response to this liquidity shock and find that firms did not increase capital expenditures, employment, R&D, or M&A, regardless of financial constraints. On the financial side, firms paid out only about one-third of the new liquidity to shareholders, and retained half as cash. This high retention was not associated with poor governance. The high propensity to retain positive liquidity shocks as cash, even among well-governed firms with limited financial constraints, is difficult to reconcile with existing theory.

We use administrative tax data from the IRS to study a tax avoidance strategy that reduces the cost of domestic research and development (R\&D). This strategy relies on cost sharing agreements that allow US multinationals (MNCs) to shift intellectual property to foreign affiliates. An unexpected tax ruling in 2005 created a loophole that allowed US MNCs to generate a tax shield by fully allocating stock compensation of employees to the domestic parent. In contrast to standard cost sharing allocations, this ruling increased the domestic tax deduction associated with R\&D expenses, which lowered the after-tax cost of R\&D. We study the effects of this ruling on market values, use of stock compensation, R\&D investment and relabeling of other costs as R\&D.

In this study, we shed light on the combined effect of corporate income tax incentives and other government policies on multinational corporations’ (MNCs) strategic location of intellectual property. Using granular affiliate-level data for MNC financials and patent ownership locations, we show that stricter employment protection laws and regulatory burdens mitigate the attractiveness of low-tax countries while tax benefits for highly-skilled workers do not affect the attractiveness of low-tax countries in MNCs’ patent location decisions. Additional tests based on the size of MNCs, migrant labor mobility, and variation over time reveal interesting additional subtleties in the interactions between government tax and non-tax policies and patent location choices. Our study contributes to the tax policy debate over cross-border competition for innovative activities by extending the analysis beyond the main effects of corporate income taxes and other government policies on firm’s patent location decisions.