Allocating Multinational Income Generated by Intangible Assets: An Industry Perspective

Abstract

This study develops a model in which a multinational firm creates a brand that generates income in multiple countries. Many firms attempt to develop a brand, but only one firm succeeds. The firm that creates the brand earns positive residual profits. The industry as a whole does not, as the residual profits are competed away by firms trying to create the brand. There is a unique allocation of taxable income among countries that is distributionally neutral at the industry level. This allocation can be achieved using the comparable profit method, but not by using other methods such as the residual profit-split method or formulary apportionment methods based on relative sales or residual profits. The message of the study is that any analysis of the taxation of residual profits is incomplete if it does not consider all the investments, including failed investments, associated with the creation of those residual profits.