Income Shifting Using a Cost Sharing Arrangement

39 Pages Posted: 31 Oct 2014 Last revised: 1 Dec 2018

See all articles by Lisa De Simone

Lisa De Simone

Stanford Graduate School of Business

Richard C. Sansing

Tuck School of Business at Dartmouth

Date Written: April 20, 2018

Abstract

This study investigates the use of a cost sharing arrangement (CSA) by a multinational corporation (MNC) with domestically developed intangible property (IP) to shift the income attributable to the IP to low-tax foreign jurisdictions. Using a strategic tax compliance model, we identify three major effects that determine whether an MNC will use a CSA to develop the IP rather than develop the IP domestically: an operating intangible effect, an undervaluation effect, and an enforcement effect. First, we find that the MNC is more likely to use a CSA to develop the IP when the MNC has valuable domestic operating intangibles, such as a global brand. Second, the MNC is more likely to use a CSA if the nature of the IP development project allows the MNC to understate the fair market value of the IP. Third, the MNC is less likely to use a CSA if the tax authority can cost-effectively challenge the position and impose retroactive revaluations of the IP. We also compare the effects of the rules in the U.S. to the OECD transfer pricing guidelines used in most other countries.

Keywords: intangible property; cost sharing arrangements; income shifting; transfer pricing; commensurate with income standard

JEL Classification: H25, D23

Suggested Citation

De Simone, Lisa and Sansing, Richard C., Income Shifting Using a Cost Sharing Arrangement (April 20, 2018). Journal of American Taxation Association, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2516471 or http://dx.doi.org/10.2139/ssrn.2516471

Lisa De Simone

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-3874 (Phone)
650-724-3083 (Fax)

HOME PAGE: http://www.gsb.stanford.edu/faculty-research/faculty/lisa-de-simone

Richard C. Sansing (Contact Author)

Tuck School of Business at Dartmouth ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-0392 (Phone)
603-646-1308 (Fax)

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