Paul L. Caron

Tuesday, May 7, 2024

Columbia Tax Workshop (Day 2)

Today's Columbia Tax Workshop is being held at its Manhattanville Campus

Columbia (2023)Katarzyna Bilicka (Utah State; Google Scholar), The Role of Intellectual Property in Tax Planning (with Paul Organ (U.S. Treasury Department; Google Scholar) & İrem Güçeri (Oxford; Google Scholar)) 
Discussant: Michael Love (Columbia)

Multinational enterprises (MNEs) that invest in research and development (R&D) and innovation find it easier to shift profits between their subsidiaries located in jurisdictions with different tax rates. While MNEs invest in R&D and develop intellectual property (IP) across multiple jurisdictions, they can also strategically move profits arising from that IP from high- to low-tax jurisdictions to reduce their overall tax bill. In this paper, we analyze and quantify the importance of two different strategies that MNEs use to move their IP to low-tax jurisdictions: selling a patent developed in a high-tax jurisdiction to a low-tax jurisdiction directly, or signing a cost-sharing arrangement (CSA) between those two jurisdictions to cover the costs of developing further IP. Combining administrative data on CSAs, patent applications and transactions, and US tax returns, we provide novel stylized facts on the use of both those strategies by MNEs. We then show that CSAs increase jurisdiction-level patenting activity, royalty payments, profits, and profitability, especially the CSAs signed with low-tax jurisdictions. At the MNE level, a new CSA significantly increases firm sales, profitability, and R&D investment, without affecting the MNE’s effective tax rates. Private firms are the only ones that experience the significant MNE-level effects on sales, profitability, and intangible assets after they sign their first CSA.

Ari Glogower (Northwestern; Google Scholar), Closing the Life Insurance Tax Loophole (with Andrew Granato (J.D.-Ph.D. Candidate, Yale))
Discussant: John Vella (Oxford) 

Permanent life insurance contracts enjoy an unparalleled combination of tax benefits. In a permanent or “cash value” contract, a portion of the premium paid is allocated to an internal savings account or “cash value reserve,” which over time reduces the amount of insured risk in the contract. The cash value reserve enables the policyholder’s beneficiary to ultimately receive a guaranteed “death benefit” that includes the policyholder’s accumulated savings upon the death of the insured person, resulting in an arrangement that resembles an investment account, rather than financial protection in the event of an untimely death.

Policyholders are not taxed on the proceeds from these contracts, nor on the “inside buildup” of investment returns on the insurance reserves. They can also make tax-favored withdrawals from the policy, borrow against the cash value, use the untaxed inside buildup to pay premiums or purchase additional insurance coverage, and in some cases avoid estate and gift taxation. No other investment form—even explicitly tax-preferred savings vehicles like IRAs—offers this combination of highly favorable tax treatment with virtually no restraints on their availability.

The life insurance industry has undergone a transformation in recent decades, shifting away from traditional term life policies that protect “widows and orphans” and towards bespoke policies for high-end investors, which they explicitly market as vehicles for tax avoidance. In many cases, the insurance contract simply operates as a formal legal “wrapper” to shield investments from taxation. The advent of “private placement life insurance” (PPLI) now allows sophisticated investors to escape taxation on a wide range of private investments within that life insurance wrapper.

These market developments have brought renewed attention to the taxation of life insurance, and motivated new proposals addressing PPLI, including by Senator Wyden and the Biden Administration. This Article offers a comprehensive overview of the policy considerations in the taxation of life insurance contracts and recommends avenues for change. While reforms to specific sectors of the marketplace like PPLI may be advantageous, policymakers should approach the issue by considering more broadly the administrative and distributional consequences of different restructuring pathways, and how they may be reconciled with the rationales underlying the tax preferences for life insurance. The Article concludes with recommendations for possible reforms that can be enacted through congressional legislation, administrative regulation, or the judiciary, and the advantages of a general cap on the size of policies qualifying for favorable tax treatment.

Eric Ohrn (Grinnell; Google Scholar), Unintended Environmental Consequences of Investment Stimulus Policy
Discussant: Patrick Kennedy (UCLA) 

Eleanor Wilking (Cornell), Leave the Data, Take the Money? Hard Choices in Platform Regulation, Understood Through Airbnb
Discussant: Tatiana Homonoff (NYU; Google Scholar)

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