Corporate Patent Transfers to Tax Havens

• In Event: Tax Evasion, Corporate Behavior, and Norms

Abstract

This paper examines how U.S. public corporations transfer intellectual property (IP) to tax havens to avoid income taxes. Using patent transaction data from the United States Patent and Trademark Office (USPTO), I find firms report worldwide effective tax rates 3.8 to 4.2 percentage points lower after assigning patents to “dot” tax havens – small, low-tax, island economies where little economic activity takes place. This translates to approximately $111 billion lower cash taxes paid and $123 billion lower income tax expense for profitable firms from 1989 to 2022. The reduction in tax rates is near immediate and persistent, with greater tax savings and tax uncertainty as firms accumulate a greater number of patents in dot havens. Despite provisions targeting IP-related tax avoidance, I do not find a significant change in the number of tax haven patent transfers following the 2017 Tax Cuts & Jobs Act (TCJA.) Foreign firms increase repatriations of patents from dot tax havens to the U.S. following the TCJA, while American firms increase patent transfers from dot tax havens to larger “Big 8” tax havens. In light of global efforts to reduce international corporate tax avoidance, the findings in this study highlight the tax savings and uncertainty faced by U.S. firms engaging in patent transfers to tax haven countries.

Author

• Angie Pae, angiepae@umich.edu