Strategic Movement of Intellectual Property within US Multinational Enterprises

Strategic behavior by US multinational enterprises (MNEs) to shift profits between countries to reduce their worldwide tax burden has been well studied. Much of the existing research has focused on the use of debt payments and intrafirm intellectual property (IP) licensing agreements to explain why and how MNEs shift income across national borders. Although these tax strategies may become less important following the US Tax Reform Act of 2017, there is evidence they have had a large impact on measures of economic activity in recent years. This paper explores how US MNEs have used cost sharing agreements between US parent companies and their foreign affiliates to shift ownership of intangible assets to lower tax jurisdictions at less‐than‐arm’s‐length prices. These transactions reduce measured US GDP and raise measured GDP in the host countries of foreign affiliates. Our empirical results are consistent with this behavior. They provide a microeconomic view of how strategic movement of IP affects key measures in the national and international economic accounts, such as GDP and the trade balance.