Borderline Case International Tax Policy, Corporate Research and Development, and Investment (1997) / Chapter Skim
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2 INTERNATIONAL TAXATION AND CORPORATION R&D: EVIDENCE AND IMPLICATIONS
2 INTERNATIONAL TAXATION AND CORPORATION R&D: EVIDENCE AND IMPLICATIONS
Pages 39-52
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From page 39... ...
In addition, enterprises may qualify to receive the research and experimentation tax credit. Furthermore, U.S.-based R&D directed at foreign markets for which American firms receive payment in the form of foreign-source royalties may receive favorable tax treatment in certain circumstances.
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From page 40... ...
tax liability on its foreign income. Firms combine their taxable incomes and taxes paid in all of their foreign operations in calculating their foreign tax credits and the foreign tax credit limit.4 Portions of this description of U.S.
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From page 41... ...
In other cases, they may anticipate that future years will be more attractive for repatriation either because domestic tax rates will be lower or because future sources of foreign income will generate excess foreign tax credits that can be used to offset U.S. tax liability on the dividends.6 It appears that in practice, U.S.
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From page 42... ...
tax on its foreign income, and any additional dollar of R&D deduction allocated against foreign income reduces the firm's U.S. taxable income by a dollar.9 Firms with deficit foreign tax credits are therefore indifferent between allocating R&D expenses against foreign income Curiously, the law is written so that the additional dollar of R&D deduction reduces taxable income without reducing the foreign tax credits available for foreign income taxes paid.
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From page 43... ...
Consequently, firms with excess foreign tax credits lose the value of any R&D deductions allocated against foreign income. It is important to consider the tax treatment of royalties together with any evaluation of the impact of the R&D expense allocation rules.
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There was no limit imposed on the degree to which allocation on the basis of gross income could reduce foreign allocation relative to the sales method. The Technical and Miscellaneous Revenue Act of 1988 changed the R&D expense allocation rules for the first part of 1988.
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From page 45... ...
Consequently, 64 percent of domestically performed R&D in 1989-1992 could be allocated against domestic income, with the remaining 36 percent allocated on the basis either of sales or of income, although use of the income method could not reduce foreign-source allocation to less than 30 percent of the foreign-source allocation that would have been produced by the sales method. Expiration of the R&D expense allocation legislation in the summer of 1992 motivated an extensive reconsideration of the issue of the appropriate tax treatment of R&D expenditures by multinational firms.
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From page 46... ...
Very few firms have excess foreign tax credits in the passive basket. Instead, the Omnibus Budget Reconciliation Act of 1993 (OBRA 93)
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From page 47... ...
In both samples, the R&D expenditures of firms with significant foreign sales and excess foreign tax credits grow systematically more slowly after 1986 than do the R&D expenditures of other firms. The implied price elasticity of R&D is -1.8 in the 40-firm subsample and -0.8 in the 116-firm sample.
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From page 48... ...
argues that such a large elasticity is consistent with an unchanged ratio of foreign to domestic R&D by American firms because the same 1986 tax change that reduced the deductibility of domestic R&D expenses also made foreign-source royalty income more attractive by increasing the number of American firms with excess foreign tax credits. The tax change discouraged American firms from undertaking R&D in the United States directed at domestic markets and encouraged R&D directed at foreign markets.
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From page 49... ...
Although this calculation omits various important considerations such as the long-run effect of the tax treatment of R&D on the entry and exit of firms into technology-intensive industries, the taxation of alternative uses of resources that would otherwise be devoted to R&D, and others, it captures one of the important considerations in the design of R&D tax policy: the trade-off between private incentives and public tax revenues. INTERNATIONAL TECHNOLOGY FLOWS AND GOVERNMENT POLICY Government policy has the ability to influence the incentives firms have to undertake R&D and to use the technology produced by research in domestic and foreign markets.
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From page 50... ...
Cross-sectional estimates of the R&D activities of foreign-owned firms in the United States in 1987 indicate a somewhat larger cross-elasticity, 0.30, which likewise suggests that imported technology and locally produced technology are substitutes. The implication of these results is that R&D cost allocation rules, the tax treatment of royalties, and other tax policies that influence levels of domestic R&D also influence the foreign R&D activities of American firms.
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From page 51... ...
1995. The Effectiveness of Research and Experimentation Tax Credits.
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From page 52... ...
Research and Development and Foreign Income. Washington, D.C.: U.S.
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