| 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. |