IDEAS home Printed from https://ideas.repec.org/p/ces/econwp/_29.html
   My bibliography  Save this paper

(Un)Intended Effects of Preferential Tax Regimes: The Case of European Patent Boxes

Author

Listed:
  • Marko Koethenbuerger
  • Federica Liberini
  • Michael Stimmelmayr

Abstract

Patent boxes have become an increasingly popular tax instrument in the European Union and the US to attract mobile tax bases of multinational enterprises (MNEs) as well as to foster productivity. This paper estimates the size of the (un)intended effects of the new preferential tax regime, which grants a reduction in the tax burden on income from intellectual property. We show that MNE affliates that can benefit from the preferential regime report 8.5 percent higher profits. The profit change splits up into a profit shifting and a productivity effect in proportions 2/3 and 1/3. Surprisingly, the profit shifting effect includes an unintended, reversed profit shifting out of the affiliate. Contrary to expectation, the overall tax base adjustment might lower tax revenues collected from MNEs.

Suggested Citation

  • Marko Koethenbuerger & Federica Liberini & Michael Stimmelmayr, 2019. "(Un)Intended Effects of Preferential Tax Regimes: The Case of European Patent Boxes," EconPol Working Paper 29, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    • Handle: RePEc:ces:econwp:_29
    as

    Download full text from publisher

    File URL: https://www.ifo.de/DocDL/EconPol_Working_Paper_29_2019.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Janeba, Eckhard & Smart, Michael, 2003. "Is Targeted Tax Competition Less Harmful Than Its Remedies?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(3), pages 259-280, May.
    2. Karkinsky, Tom & Riedel, Nadine, 2012. "Corporate taxation and the choice of patent location within multinational firms," Journal of International Economics, Elsevier, vol. 88(1), pages 176-185.
    3. Huizinga, Harry & Laeven, Luc, 2008. "International profit shifting within multinationals: A multi-country perspective," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1164-1182, June.
    4. Stefan Bender & Nicholas Bloom & David Card & John Van Reenen & Stefanie Wolter, 2018. "Management Practices, Workforce Selection, and Productivity," Journal of Labor Economics, University of Chicago Press, vol. 36(S1), pages 371-409.
    5. Haufler, Andreas & Schjelderup, Guttorm, 2000. "Corporate Tax Systems and Cross Country Profit Shifting," Oxford Economic Papers, Oxford University Press, vol. 52(2), pages 306-325, April.
    6. John Bound & Clint Cummins & Zvi Griliches & Bronwyn H. Hall & Adam B. Jaffe, 1984. "Who Does R&D and Who Patents?," NBER Chapters, in: R&D, Patents, and Productivity, pages 21-54, National Bureau of Economic Research, Inc.
    7. Andrew Atkeson & Ariel Tomás Burstein, 2010. "Innovation, Firm Dynamics, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(3), pages 433-484, June.
    8. Annette Alstadsæter & Salvador Barrios & Gaetan Nicodeme & Agnieszka Maria Skonieczna & Antonio Vezzani, 2018. "Patent boxes design, patents location, and local R&D," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 33(93), pages 131-177.
    9. Zoltan J. Acs & David B. Audretsch, 2008. "Innovation in Large and Small Firms: An Empirical Analysis," Chapters, in: Entrepreneurship, Growth and Public Policy, chapter 1, pages 3-15, Edward Elgar Publishing.
    10. Schwab, Thomas & Todtenhaupt, Maximilian, 2021. "Thinking outside the box: The cross-border effect of tax cuts on R&D," Journal of Public Economics, Elsevier, vol. 204(C).
    11. Hall, Bronwyn H. & Lerner, Josh, 2010. "The Financing of R&D and Innovation," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 609-639, Elsevier.
    12. Zvi Griliches, 1984. "R&D, Patents, and Productivity," NBER Books, National Bureau of Economic Research, Inc, number gril84-1.
    13. Dhammika Dharmapala, 2014. "What Do We Know about Base Erosion and Profit Shifting? A Review of the Empirical Literature," Fiscal Studies, Institute for Fiscal Studies, vol. 35, pages 421-448, December.
    14. Bucovetsky, Sam & Haufler, Andreas, 2007. "Preferential Tax Regimes With Asymmetric Countries," National Tax Journal, National Tax Association;National Tax Journal, vol. 60(4), pages 789-795, December.
    15. Pol Antràs & Mihir A. Desai & C. Fritz Foley, 2009. "Multinational Firms, FDI Flows, and Imperfect Capital Markets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(3), pages 1171-1219.
    16. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
    17. Yuriy Gorodnichenko & Monika Schnitzer, 2013. "Financial Constraints And Innovation: Why Poor Countries Don'T Catch Up," Journal of the European Economic Association, European Economic Association, vol. 11(5), pages 1115-1152, October.
    18. Schindler, Dirk & Schjelderup, Guttorm, 2012. "Debt shifting and ownership structure," European Economic Review, Elsevier, vol. 56(4), pages 635-647.
    19. Carine Peeters & Bruno Pottelsberghe de la Potterie, 2007. "Innovation strategy and the patenting behavior of firms," Springer Books, in: Uwe Cantner & Franco Malerba (ed.), Innovation, Industrial Dynamics and Structural Transformation, pages 345-371, Springer.
    20. Keen, Michael, 2001. "Preferential Regimes Can Make Tax Competition Less Harmful," National Tax Journal, National Tax Association;National Tax Journal, vol. 54(4), pages 757-762, December.
    21. Iacus, Stefano & King, Gary & Porro, Giuseppe, 2009. "cem: Software for Coarsened Exact Matching," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 30(i09).
    22. Matthew Blackwell & Stefano Iacus & Gary King & Giuseppe Porro, 2009. "cem: Coarsened exact matching in Stata," Stata Journal, StataCorp LP, vol. 9(4), pages 524-546, December.
    23. Nicholas Bloom & Erik Brynjolfsson & Lucia Foster & Ron Jarmin & Megha Patnaik & Itay Saporta-Eksten & John Van Reenen, 2017. "What drives differences in management?," CEP Discussion Papers dp1470, Centre for Economic Performance, LSE.
    24. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(1), pages 149-182.
    25. Zvi Griliches, 1998. "R&D and Productivity: The Econometric Evidence," NBER Books, National Bureau of Economic Research, Inc, number gril98-1.
    26. Tor Jakob Klette & Samuel Kortum, 2004. "Innovating Firms and Aggregate Innovation," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 986-1018, October.
    27. Jost H. Heckemeyer & Michael Overesch, 2017. "Multinationals profit response to tax differentials: Effect size and shifting channels," Canadian Journal of Economics, Canadian Economics Association, vol. 50(4), pages 965-994, November.
    28. Pierre Mohnen & Bronwyn Hall, 2013. "Innovation and Productivity: An Update," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 3(1), pages 47-65, June.
    29. Mintz, Jack & Smart, Michael, 2004. "Income shifting, investment, and tax competition: theory and evidence from provincial taxation in Canada," Journal of Public Economics, Elsevier, vol. 88(6), pages 1149-1168, June.
    30. Pakes, Ariel & Griliches, Zvi, 1980. "Patents and R&D at the firm level: A first report," Economics Letters, Elsevier, vol. 5(4), pages 377-381.
    31. Dischinger, Matthias & Riedel, Nadine, 2011. "Corporate taxes and the location of intangible assets within multinational firms," Journal of Public Economics, Elsevier, vol. 95(7), pages 691-707.
    32. Bronwyn H. Hall & Nathan Rosenberg (ed.), 2010. "Handbook of the Economics of Innovation," Handbook of the Economics of Innovation, Elsevier, edition 1, volume 1, number 1.
    33. Keen, Michael, 2001. "Preferential Regimes Can Make Tax Competition Less Harmful," National Tax Journal, National Tax Association, vol. 54(n. 4), pages 757-62, December.
    34. Iacus, Stefano M. & King, Gary & Porro, Giuseppe, 2012. "Causal Inference without Balance Checking: Coarsened Exact Matching," Political Analysis, Cambridge University Press, vol. 20(1), pages 1-24, January.
    35. Carine Peeters & Bruno Van Pottelsberghe, 2006. "Complex innovation strategies and patenting behaviour," ULB Institutional Repository 2013/9051, ULB -- Universite Libre de Bruxelles.
    36. Buettner, Thiess & Overesch, Michael & Schreiber, Ulrich & Wamser, Georg, 2012. "The impact of thin-capitalization rules on the capital structure of multinational firms," Journal of Public Economics, Elsevier, vol. 96(11), pages 930-938.
    37. Matthias Dischinger & Bodo Knoll & Nadine Riedel, 2014. "The role of headquarters in multinational profit shifting strategies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(2), pages 248-271, April.
    38. Griliches, Zvi, 1998. "R&D and Productivity," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226308869, September.
    39. Riedel, Nadine & Böhm, Tobias & Karkinsky, Tom & Knoll, Bodo, 2015. "Corporate Taxes and Strategic Patent Location within Multinational Firms," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112978, Verein für Socialpolitik / German Economic Association.
    40. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-583, June.
    41. Dennis C. Mueller & John E. Tilton, 1969. "Research and Development Costs as a Barrier to Entry," Canadian Journal of Economics, Canadian Economics Association, vol. 2(4), pages 570-579, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ronald B. Davies & Dieter F. Kogler & Ryan Hynes, 2020. "Patent Boxes and the Success Rate of Applications," CESifo Working Paper Series 8375, CESifo.
    2. Grazzini Lisa & Petretto Alessandro, 2022. "Heterogeneous capital tax competition in a federation with asymmetric tax compliance," German Economic Review, De Gruyter, vol. 23(4), pages 669-705, December.
    3. Ciaramella, Laurie, 2023. "Taxation and the transfer of patents: Evidence from Europe," European Economic Review, Elsevier, vol. 151(C).
    4. İrem Güçeri & Marko Köthenbürger & Martin Simmler, 2020. "Supporting Firm Innovation and R&D: What is the Optimal Policy Mix?," EconPol Policy Reports 20, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marko Köthenbürger & Federica Liberini & Michael Stimmelmayr, 2018. "Is it just Luring Reported Profit? The Case of European Patent Boxes," CESifo Working Paper Series 7061, CESifo.
    2. Stimmelmayr, Michael & Koethenbuerger, Marko & Liberini, Federica, 2016. "Is it Luring Innovations or just Profit? The Case of European Patent Boxes," VfS Annual Conference 2016 (Augsburg): Demographic Change 145582, Verein für Socialpolitik / German Economic Association.
    3. Knoll, Bodo & Riedel, Nadine & Schwab, Thomas & Todtenhaupt, Maximilian & Voget, Johannes, 2021. "Cross-border effects of R&D tax incentives," Research Policy, Elsevier, vol. 50(9).
    4. Florian Chatagny & Marko Koethenbuerger & Michael Stimmelmayr, 2017. "Introducing an IP license box in Switzerland: quantifying the effects," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(6), pages 927-961, December.
    5. Mongrain, Steeve & Oh, David & van Ypersele, Tanguy, 2023. "Tax competition in the presence of profit shifting," Journal of Public Economics, Elsevier, vol. 224(C).
    6. Pranvera Shehaj & Alfons J. Weichenrieder, 2024. "Corporate income tax, IP boxes and the location of R&D," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(1), pages 203-242, February.
    7. Egger, Peter & Eggert, Wolfgang & Winner, Hannes, 2010. "Saving taxes through foreign plant ownership," Journal of International Economics, Elsevier, vol. 81(1), pages 99-108, May.
    8. Sabine Schenkelberg, 2020. "The Cadbury Schweppes judgment and its implications on profit shifting activities within Europe," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(1), pages 1-31, February.
    9. Arnt Ove Hopland & Petro Lisowsky & Mohammed Mardan & Dirk Schindler, 2014. "Income Shifting under Losses," CESifo Working Paper Series 5130, CESifo.
    10. Haufler, Andreas & Runkel, Marco, 2012. "Firms' financial choices and thin capitalization rules under corporate tax competition," European Economic Review, Elsevier, vol. 56(6), pages 1087-1103.
    11. Lisa Evers & Helen Miller & Christoph Spengel, 2015. "Intellectual property box regimes: effective tax rates and tax policy considerations," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(3), pages 502-530, June.
    12. İrem Güçeri & Marko Köthenbürger & Martin Simmler, 2020. "Supporting Firm Innovation and R&D: What is the Optimal Policy Mix?," EconPol Policy Reports 20, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    13. Makoto Hasegawa, 2023. "Territorial Tax Reform and Profit Shifting by US and Japanese Multinationals," National Tax Journal, University of Chicago Press, vol. 76(4), pages 771-804.
    14. Ronald B. Davies & Dieter Franz Kogler & Ryan M. Hynes, 2020. "Patent Boxes and the Success Rate of Applications," Working Papers 202018, School of Economics, University College Dublin.
    15. Ropponen, Olli, 2021. "Interest Limitation Rules and Business Cycles: Empirical Evidence," ETLA Working Papers 90, The Research Institute of the Finnish Economy.
    16. Sebastian Beer & Ruud de Mooij & Li Liu, 2020. "International Corporate Tax Avoidance: A Review Of The Channels, Magnitudes, And Blind Spots," Journal of Economic Surveys, Wiley Blackwell, vol. 34(3), pages 660-688, July.
    17. Ruud Mooij & Li Liu, 2020. "At a Cost: The Real Effects of Transfer Pricing Regulations," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(1), pages 268-306, March.
    18. Fatica, Serena & Gregori, Wildmer, 2018. "Profit shifting by EU banks: evidence from country-by-country reporting," JRC Working Papers in Economics and Finance 2018-04, Joint Research Centre, European Commission.
    19. Bettina Becker, 2013. "The Determinants of R&D Investment: A Survey of the Empirical Research," Discussion Paper Series 2013_09, Department of Economics, Loughborough University, revised Sep 2013.
    20. Hebous, Shafik & Johannesen, Niels, 2021. "At your service! The role of tax havens in international trade with services," European Economic Review, Elsevier, vol. 135(C).

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:econwp:_29. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/ifooode.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.