Abstract
The taxation of multinational income is the subject of important policy debates. For example, the recent Pillar One proposal by the Organisation for Economic Development and Cooperation (OECD) would shift taxing rights from countries in which value is created to countries where it is realized. This study develops and analyzes a model in which a multinational firm creates a valuable intangible asset, referred to as a brand. The brand is developed in one country and generates future positive residual profits in three countries. At the industry level, these residual profits are competed away by many firms that try to create the brand, only one of which succeeds. It compares various methods of allocating multinational profits for tax purposes. Separate accounting using an arm’s length royalty that taxes income based on where value is created satisfies the criterion of distributional neutrality. Other methods that allocate some or all income based on where value is realized violates distributional neutrality.
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Notes
Dividing foreign operations into one production country and one market country is for expositional convenience only. It helps illustrate different methods of allocating income among countries. The foreign production and market countries can be the same country.
Unconstrained entry in the first stage is an important assumption. Suppose instead that the number of firms that are competing to develop the brand were exogenously limited, which would create positive expected economic profits to the industry. This in turn would mean that the firms that can try to develop the brand are special in some way. A complete analysis of this setting would have to include an explanation of what these special firms had done to have the ability to earn expected global abnormal profits. A model that adopts as a starting point a setting in which some firms are exogenously endowed with the ability to earn positive abnormal profits is incomplete without a discussion of why these firms can earn abnormal economic profits but others cannot.
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Acknowledgements
I thank Harald Amberger, Lillian Mills, Rainer Niemann, Leslie Robinson, participants in the 2020 EIASM Conference on Current Research in Taxation, participants in the University of Georgia accounting workshop, the Texas Tax Readings Group, the editor (Jennifer Blouin), and an anonymous reviewer for helpful comments.
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Sansing, R. Taxing multinational income based on value creation versus value realization: an industry perspective. Rev Account Stud 29, 1831–1853 (2024). https://doi.org/10.1007/s11142-022-09747-4
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DOI: https://doi.org/10.1007/s11142-022-09747-4