Offshore Profit Shifting and Domestic Productivity Measurement

Abstract

Beginning in 2004, official statistics display a slowdown in U.S. productivity growth. We show how offshore profit shifting by U.S. multinational enterprises affects GDP and, thus, productivity measurement. Profit shifting increased in the mid-1990s, resulting in lower measured productivity growth. We construct value added adjusted for profit shifting. The adjustments raise aggregate productivity growth rates by 0.09 percent annually for 1994-2004, 0.24 percent annually for 2004-2008, and lower annual aggregate productivity growth rates by 0.09 percent after 2008. The adjustments are large in R&D-intensive industries, where value added increases by as much as 8 percent in the mid-2000s.

International Technology Licensing, Intellectual Property Rights, and Tax Havens

“…For an innovator to have an incentive to license a technology in a foreign market, she must be confident that firms licensing the technology will not copy it or leak it to other competitors. In this case, Second, I use data from the GCI historical dataset for various indicators about taxation and the legal system that could have an impact on royalty payments beyond size and remotenes: (i) the tax rate (as a percentage of profits), as countries with high corporate income taxes may be tempted to transfer their technology to countries with low tax rates because of profit-shifting motives (see Guvenen et al, 2017;Bruner, Rassier, and Ruhl, 2018); (ii) the amount of FDI and technology transfers, which measures the extent to which FDI brings new technology in another country; and (iii) the degree of foreign ownership. A large amount of FDI and foreign ownership could either increase or decrease royalty payments, since a parent company that opens a foreign affiliate could transfer its IP abroad in two ways: licensing it in exchange of a royalty payment, or transferring the IP's ownership, in which case profits would remain abroad and would be taxed according to foreign corporate income taxes.…”

“…For instance, imperfect enforcement of IPR may deter developed countries from transferring technology to profitable markets if the threat of imitation in those markets could negatively affect the innovator's profits (see Maskus, 2004). Moreover, a country's taxation and legal system may drive technology transfer from high-taxation countries to low-taxation countries for profit-shifting motives (Guvenen et al, 2017;Bruner, Rassier, and Ruhl, 2018). 1 Understanding the economic fundamentals behind international technology diffusion as well as identifying potential market failures is important to promote technological change and, eventually, economic growth.…”

“…In their model, technology transfers happen at arms-length relationships. Second, it relates to studies on the role of taxation and the legal system of the country receiving the technology (Guvenen et al, 2017;Bruner, Rassier, and Ruhl, 2018).…”

Accounting for Factorless Income

“…Smith, Yagan, Zidar, and Zwick (2017) offer evidence that labor income has increasingly been misreported as capital income in U.S. S-corporations in order to minimize tax exposures, leading to an overstatement of the U.S. labor share decline. Guvenen, Mataloni, Rassier, and Ruhl (2017) find that U.S. multinationals have increasingly shifted intellectual property capital income to foreign jurisdictions with lower taxes, leading to an understatement of the U.S. labor share decline.…”

Modern trends in corporate income taxation: perspectives of the withdrawn capital tax

“…However, one can construct rough estimates by comparing the reported location of profits to the location of less easily manipulated measures of activity, such as sales and payroll. Using this approachallocating the worldwide profits of US multinationals according to a simple average of worldwide payroll shares and sales shares - Guvenen et al (2017) estimate that these companies shifted $280 billion in profits out of the United States in 2012. 12 This overstatement of net US imports would account for more than half of that year's trade deficit.…”