Tax avoidance as an R&D subsidy: the use of cost sharing agreements by US multinationals

Lysle Boller, Clare Doyle and Juan Carlos Suárez Serrato ()
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Lysle Boller: Penn Wharton Budget Model
Clare Doyle: Stanford GSB
Juan Carlos Suárez Serrato: Stanford GSB

International Tax and Public Finance, 2025, vol. 32, issue 6, No 4, 1733 pages

Abstract: Abstract We use administrative corporate tax data from the IRS to study a particular form of tax avoidance for US multinational corporations (MNCs). This strategy relies on cost sharing agreements (CSAs), which govern joint R&D efforts conducted with foreign affiliates and allow US MNCs to shift profits by moving intellectual property abroad. We analyze an unexpected 2005 Tax Court ruling that additionally allowed MNCs with CSAs to engage in cost shifting: by excluding employee stock option compensation costs from CSAs, the ruling allowed MNCs to allocate these formerly-shared costs entirely to their US parent corporations. This in turn increased the domestic tax deduction associated with R&D expenses, generating a tax shield that lowered the after-tax cost of domestic R&D. We show that the regulatory change increased market value, R&D investment, and cost shifting margins among US MNCs with CSAs following the ruling. Our results demonstrate how tax minimization strategies can translate into real changes in innovative economic activity.

Keywords: Cost sharing agreements; Profit shifting; Cost shifting; R&D; D22; H25; H26; H32; O38 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10797-025-09900-0

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