Corporate taxation and the choice of patent location within multinational firms

Abstract

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 ForeignCompany' rules tend to decrease the number of patent applications.JEL classification: H25, F23, H26, C33

Trading Offshore: Evidence on Banks' Tax Avoidance

“…However, studies of specific methods of profit shifting have found decidedly higher tax semi-elasticities. For example, Karkinsky and Riedel (2012) document a semi-elasticity of -3.8 for patent applications; Dudar and Voget (2016) find a semi-elasticity of -6.2 for trademarks. These comparisons indicate that the tax sensitivity of assets held for proprietary trading is high, but comparable to other assets that firms relocate specifically in response to tax differentials.…”

Indirect Access to Intellectual Property Regimes - Effects on Austrian and German Affiliates

“…They look at di↵erences in the statutory tax rates of a liates across an MNE group, and account for patent box regimes by lowering the assumed corporate income tax rate operating in countries with preferential regimes. Karkinsky and Riedel (2012)) and Gri th, Miller and OConnell (2014) show that patent registration is sensitive to corporate tax rates. Ernst, Richter and Riedel (2014) report that jurisdictions with lower tax rates attract patent applications of higher quality and corresponding revenue streams.…”

“…Ernst, Richter and Riedel (2014) report that jurisdictions with lower tax rates attract patent applications of higher quality and corresponding revenue streams. Looking at European firms, Boehm, Karkinsky and Riedel (2012) demonstrate that a significant share of patent applications in low tax countries such as Ireland and Switzerland have been developed abroad. Focusing directly on the introduction of Patent Boxes in European Countries, demonstrate that preferential IP regimes substantially reduce e↵ective tax burdens, with the treatment of expenses and definition and determination of eligible income having similar importance as the nominal tax rates being o↵ered.…”

Corporate taxation and the quality of research and development

“…3 Griffith et al (2011), Ernst andSpengel (2011) and Karkinsky and Riedel (2012) moreover find a negative effect of patent income taxes on the number of corporate patent applications. As the authors focus on the location of the patent applicant (who is presumed to be the owner of the associated royalty income) and do not distinguish between patents where applicant and inventor are located in the same and different countries respectively, the findings may reflect both, responses in the quantity of corporate R&D activity to patent income taxation as well as the strategic location of mobile patent income in low-tax countries, e.g.…”