- Profit Shifting Through Intellectual Property
FRB of St. Louis
In this essay, we show that large movements of IP toward low-tax jurisdictions is indeed a channel through which multinational corporations shift profits abroad. Using patent data from PATSTAT, we compute for a sample group of countries the number of patent applications in the 2010s filed in foreign countries.3 Patent application data are reported according to both the residence of the inventor and the residence of the applicant, regardless of whether the applicant is also the inventor. We argue that discrepancies between the number of patent applications by applicants and the number by inventors (the applicant-to-inventor ratio) provide suggestive evidence of profit shifting through IP.
Take the case of an engineer working for a tech company based in Silicon Valley who invents a new IP. On the initial application, let‘s assume the tech company, a U.S. multinational corporation, is the applicant and the engineer is the inventor. In this case, the country of the inventor and the applicant will both be the United States, so this application would be counted as 1 by applicant and 1 by inventor for patents originating in the United States. However, if the multinational transfers ownership of the IP to a subsidiary in Bermuda, the subsidiary in Bermuda will be listed as the applicant on subsequent filings since they now own the IP. Hence, for Bermuda if the multinational were to file a subsequent application, this application would be counted as 1 by applicant and 0 by inventor for patents originating in Bermuda.