ABSTRACT
This study investigates the use of a cost-sharing arrangement (CSA) by a multinational corporation (MNC) to shift the income attributable to intangible property (IP) to low-tax foreign jurisdictions. We identify three major effects that determine whether an MNC will use a CSA to develop the IP rather than develop the IP domestically: an operating intangible effect, an undervaluation effect, and an enforcement effect. First, we find that the MNC is more likely to use a CSA to develop the IP when the MNC has valuable domestic operating intangibles, such as a global brand. Second, the MNC is more likely to use a CSA if the nature of the IP development project allows the MNC to understate the fair market value of the IP. Third, the MNC is less likely to use a CSA if the tax authority can cost effectively challenge the position and impose retroactive revaluations of the IP.
JEL Classifications: H25; D23.
