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Corporate Taxation and the Choice of Patent Location within Multinational Firms

  • Tom Karkinsky

    ()

    (Oxford University Centre for Business Taxation)

  • Nadine Riedel

    ()

    (Oxford University Centre for Business Taxation, CESifo Munich)

Corporate patents are perceived to be the key profit-drivers in many multinational enterprises (MNEs). Moreover, as the transfer pricing process for royalty payments is often highly intransparent, they also constitute a major source of profit shifting opportunities between multinational entities. For both reasons, MNEs have an incentive to locate their patents at affiliates with a relatively small corporate tax rate. Our paper empirically tests for this relationship by exploiting a unique dataset which links information on patent applications to micro panel data for European MNEs. Our results suggest that the corporate tax rate (differential to other group members) indeed exerts a negative effect on the number of patents filed by a subsidiary. The effect is quantitatively large and robust against controlling for affiliate size. The findings prevail if we additionally account for royalty withholding taxes. Moreover, binding `Controlled Foreign Company' rules tend to decrease the number of patent applications.

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Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 0931.

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Date of creation: 2009
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Handle: RePEc:btx:wpaper:0931
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