Cover of EconPol Working Paper 29

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

Marko Koethenbuerger, Federica Liberini, Michael Stimmelmayr

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 shows 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.

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.

Citation

Marko Koethenbuerger, Federica Liberini and Michael Stimmelmayr: (Un)Intended Effects of Preferential Tax Regimes: The Case of European Patent Boxes, EconPol Working Paper 29, July 2019.