Download This PaperTaxing Multinational Income Based on Value Creation Versus Value Realization: An Industry Perspective
37 Pages Posted: 15 Apr 2020 Last revised: 14 Nov 2022
There are 2 versions of this paper
Taxing Multinational Income Based on Value Creation Versus Value Realization: An Industry Perspective
Taxing Multinational Income Based on Value Creation Versus Value Realization: An Industry Perspective
Date Written: November 10, 2022
Abstract
The taxation of multinational income is the subject of important policy debates. For example, the recent Pillar One proposal by the Organization for Economic Development and Cooperation (OECD) would shift taxing rights from countries in which value is created to countries where value is realized. This study develops and analyzes a model in which a multinational firm creates a valuable intangible asset, referred to as a brand. The brand is developed in one country and generates future positive residual profits in three countries. At the industry level, these residual profits are competed away by many firms that try to create the brand, only one of which succeeds. It compares various methods of allocating multinational profits for tax purposes. Separate accounting using an arm’s-length royalty that taxes income based on where value is created satisfies the criterion of distributional neutrality. Other methods that allocate some or all income based on where value is realized violates distributional neutrality.
Keywords: transfer pricing, intangible assets, multinational taxation, brands
JEL Classification: H25, H32, M41, M48
Suggested Citation: Suggested Citation