The Impact of the 2017 Tax Cuts and Jobs Act on U.S. Multinationals' Intangible Assets

Abstract

This article investigates the impact of the 2017 Tax Cuts and Jobs Act (TCJA) on the intangibles of U.S. multinationals. We develop a theoretical model that incorporates key provisions of the TCJA—Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII)—and derive testable implications for changes in licensing and patent transfer patterns. Using data on international royalty flows and patent assignments, we test the model’s predictions. Our findings suggest that the TCJA may have impacted profit-shifting strategies through intangibles, aligning with our model’s predictions.

Introduction

Intellectual property (IP) has become a key driver of innovation and economic growth in the increasingly technology-driven global economy. For multinational corporations (MNCs), intangibles such as patents, trade-marks, copyrights, and trade secrets are highly valuable and mobile, making them an attractive tool for profit shifting. Profit shifting is a practice in which MNCs move their profits from high- to low-tax countries to lower their overall tax burden. One of the most common forms of this practice is the transfer of IP. MNCs can license their IP to foreign entities and receive royalty payments taxed at the domestic rate, or they can transfer ownership of the IP to foreign affiliates, often at a discounted rate, and have the royalty payments taxed at the foreign rate. The decision between these two options is largely influenced by differences in corporate tax rates across countries. By strategically allocating their profits to subsidiaries or affiliates located in these low-tax jurisdictions, MNCs can significantly reduce their overall tax burden, even if the majority of their economic activity occurs in higher-tax countries.