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

41 Pages Posted: 13 Jul 2007 Last revised: 14 Sep 2010

See all articles by John Mutti

John Mutti

Grinnell College - Department of Economics

Harry Grubert

U.S. Department of the Treasury, Office of Tax Analysis (OTA); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 2007

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

Mutti, John and Grubert, Harry, The Effect of Taxes on Royalties and the Migration of Intangible Assets Abroad (July 2007). NBER Working Paper No. w13248. Available at SSRN: https://ssrn.com/abstract=1000352

John Mutti (Contact Author)

Grinnell College - Department of Economics ( email )

P.O. Box 805
Grinnell, IA 50112
United States
515-269-3143 (Phone)
515-269-4985 (Fax)

Harry Grubert

U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave. NW
Washington, DC 20220
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
99
Abstract Views
964
rank
263,745
PlumX Metrics