The new World Intellectual Property Report 2017, by the World Intellectual Property Organization (WIP0), estimates that nearly one third of the value of manufactured products sold around the world comes from “intangible capital,” such as branding, design and technology. The WIPO study of the global value chains companies use to produce their goods shows that intangible capital contributes twice as much as buildings, machinery and other forms of tangible capital to the total value of manufactured goods. This underscores the growing role of intellectual property, which is frequently used to protect intangible and related assets in the worldwide economy.
I was fortunate to work with Sacha Wunsch-Vincent, a WIPO senior economist, to analyze the effects of tax planning in multinational companies' value chains on countries' national income statistics. Our new WIPO working paper explains how the current measures of intellectual property payments and receipts are distorted, and significantly understated in high-tax-rate countries. Click here to the link to our working paper.
The phenomenon of global fragmented production and associated trade in intermediate products, including intangible assets, has changed how economists study globalization and how new public policies are shaped. Understanding cross-border flows of disembodied knowledge, often associated with intellectual property (IP), is essential to analyzing how modern economies operate. Available data to document these international IP-related knowledge flows – namely cross-border payments for IP - are distorted by various factors.
Tax planning by multinational enterprises has seriously distorted the measurement of cross-border IP flows, which affects national measurement of imports, exports, GDP and productivity. Intangible assets and their income flows are a major source of profit-shifting across countries through transfer mis-pricing and other tax planning. The tax-induced mismeasurement could be more than 35% of global Charges for Use of Intellectual Property (CUIP), and greater for individual countries, particularly high-tax-rate countries. International initiatives to address tax base erosion and profit shifting (BEPS) and other statistical initiatives on global value chains w ill improve future measurements of cross-border IP flows, improving the understanding of both the creation and uses of IP.
Since the working paper, I did a simple regression of CUIP receipts as a percent of GDP in OECD countries in 2015, which finds that tax haven status (e.g. Ireland, Luxembourg, Netherlands and Switzerland) is a strong predictor of CUIP receipts, rather than R&D spending relative to GDP or patent box or ordinary corporate statutory tax rates. Actual effective tax rates on much of intangible capital payments in these tax-haven countries are significantly lower than the statutory tax rates due to administrative rulings and special deals. Most Caribbean islands don't report CUIP in the national statistics. Tougher anti-BEPS rules as a result of the OECD/G20 BEPS Project and Inclusive Framework will reduce the tax distortions of national statistics on this important source of economic growth.