Taxing multinational income based on value creation versus value realization: an industry perspective

• Published in: Review of accounting studies 2024-06, Vol.29 (2), p.1831-1853
• Main Author: Sansing, Richard
• Format: Article
• Language: English
• Subjects: Accounting/Auditing; Business and Management; Cooperation; Corporate Finance; Corporate income tax; Corporate profits; Foreign subsidiaries; Multinational corporations; Neutrality; Present value; Public Finance; Taxable income; Transfer pricing; Value creation
• ISSN: 1380-6653; 1573-7136
• DOI: 10.1007/s11142-022-09747-4

The taxation of multinational income is the subject of important policy debates. For example, the recent Pillar One proposal by the Organisation for Economic Development and Cooperation (OECD) would shift taxing rights from countries in which value is created to countries where it is realized. This study develops and analyzes a model in which a multinational firm creates a valuable intangible asset, referred to as a brand. The brand is developed in one country and generates future positive residual profits in three countries. At the industry level, these residual profits are competed away by many firms that try to create the brand, only one of which succeeds. It compares various methods of allocating multinational profits for tax purposes. Separate accounting using an arm’s length royalty that taxes income based on where value is created satisfies the criterion of distributional neutrality. Other methods that allocate some or all income based on where value is realized violates distributional neutrality.