UC Irvine

I study whether patents pledged as collateral for debt financing constrain US multinationals’ (MNCs) tax-motivated outbound income shifting (TMOIS). US MNCs generally prefer high patent valuations when collateralizing their patents but low patent valuations when using patents for TMOIS. Tax authorities can rely on patent collateral valuations to constrain US MNCs’ ability to artificially depress patent values for TMOIS. Moreover, banks often restrict US MNCs from relocating collateralized patents in lending contracts. Therefore, US MNCs that collateralize patents face increased costs of using those patents to engage in TMOIS. I provide evidence that the number of collateralized patents is negatively associated with US MNCs’ TMOIS. The negative association between patent collateralization and TMOIS is more pronounced for US MNCs with strong debt financing needs and when tax authorities’ resources are constrained. My study sheds light on a source of information that tax authorities can rely on to detect and deter aggressive income shifting strategies.