Research On Transfer Pricing Of Multinational Enterprises’ Intangible Assets

With the development of global economic integration,current commercial competitive environment has gradually evolved and accompanied by an essential development of information technologies.For the business environment where intangible assets serve as dominant driving force of value creation power,the adaption ability of current international tax legal system has been significantly weakened.Due to the multinational and hidden characteristics of intangible assets’ transfer across boundaries,multinational enterprises often utilize the differences between national tax treaties and national tax systems.High-value intangible assets are transferred from higher tax countries,and reconfigured to a few lower tax countries or tax haven islands.Related studies have shown that the greater the differences of tax rates between subsidiaries located in different tax jurisdictions,the more tax bases are transferred by multinational companies in these countries.Moreover,multinational enterprises tend to develop low-cost outsourcing and marketing class intangible assets in foreign markets,which has recently become a new transfer pricing form in these countries,especially high-tax countries,and exacerbated the tax conflict between different countries.As an invisible asset with no physical form,only a small part of the intangible assets can be confirmed.The accounting book in enterprise cannot truly reflect the value-driven effect of intangible assets,mainly because the royalties,trademark royalties and technical service fees associated with patents are not very transparent in transfer pricing process.Therefore,intangible assets actually becomes an important approach for transfer pricing in multinational corporations,and it becomes more and more urgent to settle the problem of income sources and tax benefits of intangible assets in a highly globalized economies.Given that it is difficult for tax authorities to obtain fair values of royalties,multinational companies often shift their profits and tax bases between all operating subsidiaries and tax havens with intangible assets by distorting their transfer prices.Therefore,different from previous studies in R&D tax credits,the article considers patents configuration as a special form of intangible assets.Under the comprehensive review of the literature about intangible assets and their income transferring by multinational enterprises,this article focuses on national corporate income tax differences and the intangible assets price,especially in low-tax countries,and analyzes their relationship both theoretically and empirically.Then this article propose a policy suggestion for a reasonable tax benefit distribution in different countries,as well as a reasonable tax benefit return in China:Firstly,this article investigates the development of intangible assets and transfer pricing theory,analyzes identification criteria,value decisions and evaluation methods of intangible assets,and elaborates on the major development procedure of transfer pricing rules and methods in intangible assets.This article illustrate the mechanism of how multinational enterprises’ shift transfer profits and tax bases with intangible assets in different aspects,including manipulating transfer prices in related parties,changing the contract structure within group manually,reconfiguring the company structure and patent licenses.Then,this article describes the whole process of how multinational enterprises obtain tax interest with transfer pricing of intangible assets in detail,and elaborates the mechanism of how national corporate income tax differences apply to the patents’ transfer.Our studies show that:(1)Multinational enterprises use the obvious differences in tax rates between countries to increase or decrease the transfer price,so that a greater part of the whole profits flow into tax havens and pay taxes at a lower tax rate.(2)Multinational enterprises complete low-cost production through changing the R&D and marketing contract arrangement of intangible assets,and use the lower tax rate of the parent company or subcontracting companies to transfer pricing,which acts as the major strategy to obtain operating profits in relevant countries.(3)The usage of exclusive or non-exclusive license agreements is a typical method of transferring intangible assets between related parties.Then it also analyzes multinational enterprises’ motivation and evolution process of cross-border profit transfer and tax bases erosion in intangible assets,as well as the subsequent national economic conflicts of interest.Our studies show that intangible assets reconfiguration has become the major approach for multinational companies to implement profit transfer,which has intensified the harmful tax competition among countries.Secondly,this article conducts an empirical analysis of the relationship between multinational enterprises’ intellectual property rights transfer and the subsequent tax interest’s damage between countries.We use a new data set to study the impact of how corporate income tax acts with patent transfer locations within a multinational group.This data set builds a clear bridge between the patent applications of global multinational companies and company-level financial and ownership,and all the real-time patents contain the ownership changes.To ensure the analysis stability of how corporate income tax act with the internal patent location in multinational companies,this article also includes all tax information from 186 typical countries and affiliated island in the world.Combining patent applications filed by global multinationals with company-level financial and ownership data,the combined dataset captures experimental evidence of patent re-allocation by multinational companies from 186 countries and affiliated islands in the world.Our studies show that:(1)China has the largest number of net transfer-out patents,followed by four high-tax countries in India,Germany,Canada and the United Kingdom.(2)The top net patent transfer-in countries,such as Switzerland,the Netherlands,the Cayman Islands,Luxembourg,Singapore,the British Virgin Islands,Ireland,Hong Kong China,Barbados,Bermuda,Malta,Bahamas,Seychelles The archipelago and the Samoan Islands are all famous tax havens.(3)Based on the above findings,multinational enterprises’ patent migration path appears to be transferred from most high-tax countries and reconfigured to a few low-tax countries and tax havens.Thirdly,based on the perspective of the transfer of patent lications within multinational groups,this article analyzes the typical tax rate variables and alternative tax measures,the net transfer-in and net transfer-out countries,mixed regression and individual effects based on the panel data of 186 countries around the world.The typical net transfer-out countries are analyzed emphatically.This article explores the different effects of different tax rate indicators on the transfer of patent locations within multinational groups,and empirically examines the impact of corporate income tax differences between countries on the use of intangible assets licenses by multinational companies to transfer license proceeds to low-tax countries.The results show that:(1)In order to reduce the tax burden,multinational enterprises have allocated their own patents to subsidiaries of low-tax countries and tax havens,confirming the link between the profit transfer activities of multinational enterprises and intellectual property ownership.(2)Among them,the patent box system has intensified the liquidity tax base,such as patent income into the tax preferential jurisdiction due to its favorable tax treatment.(3)From the realistic migration path of patents,Chinese multinational companies transfer patents to subsidiaries in the Cayman Islands,Switzerland,HongKong China and the Netherlands.The Cayman Islands is the largest net transfer-out of Chinese patents.(4)Considering that the actual tax burden of royalties related to patents may be affected by a variety of factors,such as royalties withholding taxes and controlled foreign companies legislation,the test finds that alternative tax measures has practical effects on restricting the outflow of intangible assets,but the policy needs to extend from a few countries to low-tax countries and tax havens represented by Switzerland,the Netherlands,and the Cayman Islands.Finally,based on the above theoretical analysis and empirical evaluation results,this article comprehensively examines the transfer pricing optimization of intangible assets to achieve a reasonable tax benefit distribution in different countries.Many high-tax economy entities with large-scale R&D activities,such as China,must restrict the transfer-out process of patents and other intangible assets.As the country with the largest number of net transfer-out patents,China is particularly urgent.Therefore,this article proposes a policy suggestion for a reasonable tax benefit return,including improving the tax base division of intangible assets among relevant countries,strengthening the application of general anti-tax avoidance rules in parent companies and subsidiaries,tightening the legislation of controlled foreign companies,and carrying out tax cooperation in multinational jurisdictions.