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Taxing Royalty Payments

Author

Listed:
  • Juranek, Steffen

    (Dept. of Business and Management Science, Norwegian School of Economics)

  • Schindler, Dirk

    (Dept. of Accounting, Auditing and Law, Norwegian School of Economics)

  • Schjelderup, Guttorm

    (Dept. of Business and Management Science, Norwegian School of Economics)

Abstract

The digital economy is characterized by the use of intellectual property such as software, patents and trademarks. The pricing of such intangibles is widely used to shift profits to low-tax countries. We analyze the role of a source tax on royalty payments for abusive transfer pricing, and optimal tax policy. First, we show that mispricing of royalty payments does not affect investment behavior by multinationals. Second, it is in the vast majority of cases not optimal for a government to set the source tax equal to the corporate tax rate. The reason is that shutting down abusive transfer pricing activities needs to be traded off against mitigating the corporate tax distortion in capital investment. The latter can be achieved by some tax deductibility of royalty payments. If the true arm's length transfer price equals zero or for special corporate tax systems that treat debt and equity alike (i.e., for ACE and CBIT), it will be optimal to equate both tax rates.

Suggested Citation

  • Juranek, Steffen & Schindler, Dirk & Schjelderup, Guttorm, 2016. "Taxing Royalty Payments," Discussion Papers 2016/16, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2016_016
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    File URL: http://hdl.handle.net/11250/2407817
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    References listed on IDEAS

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    Cited by:

    1. Sijbren Cnossen, 2018. "Corporation taxes in the European Union: Slowly moving toward comprehensive business income taxation?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(3), pages 808-840, June.

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    More about this item

    Keywords

    Royalty taxation; intellectual property; multinationals; profit shifting;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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