Just Compensation as Transfer Prices
62 Pages Posted: 19 Apr 2016 Last revised: 8 Dec 2016
Date Written: April 15, 2016
This Article proposes using eminent domain to fight both transfer-pricing abuse and the deadweight losses created by intellectual property. IP creates deadweight losses, because the exclusive rights granted to IP owners allow them to charge higher prices that keep some customers out of the market entirely. IP also allows multinational corporations to avoid taxes on a massive scale, by transferring their IP to tax havens for artificially low prices.
This Article’s proposal would address both problems simultaneously. The government should use eminent domain (also called compulsory purchase) to take some percentage of IP transferred by multinationals to tax havens. Compensation to the multinational should equal the price the multinational chose for transferring the IP. The government should then dedicate the taken IP to the public domain, thereby eliminating the deadweight losses. The threat of taking for transfer prices will reduce tax avoidance. This solution passes legal muster, since tax law requires that IP owners attest (under penalties of perjury) that the transfer prices chosen for tax purposes meet a standard that is identical to the Fifth Amendment Takings Clause standard for determining “just compensation.” Crucially, this solution would not reduce the incentives IP law creates for innovation, but would merely cut the average tax savings from transferring the IP to tax havens.
This Article also makes two theoretical contributions. First, it upends the widespread assumption that allowing property owners to self-assess their potential “just compensation” works only for real property. Second, it challenges the conventional wisdom that transferring IP to tax havens is always socially detrimental. This Article’s proposal harnesses these tax-avoidance strategies to eliminate deadweight losses.
Keywords: tax, transfer pricing, patents, patent law, intellectual property, intangible property, drug pricing, copyrights, eminent domain, Fifth Amendment, self-assessment
JEL Classification: K34
Suggested Citation: Suggested Citation