Decline of CFC Rules and Rise of IP Boxes: How the ECJ Affects Tax Competition and Economic Distortions in Europe

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Decline of CFC Rules and Rise of IP Boxes: How the ECJ affects Tax Competition and Economic Distortions in EuropeRainer Bräutigam (ZEW and University of Mannheim)Christoph Spengel (University of Mannheim and ZEW)Frank Streif (ZEW and University of Mannheim)This version: August 2015 Abstract:The European Court of Justice (ECJ) has become an influential player in the field of direct taxation in the European Union in the past twenty years. However, it is unclear whether the ECJ's decisions actually increase tax neutrality and therefore contribute to the achievement of an internal market as stipulated by the European treaties or not. In 2006, the ECJ limited the applicability of specific tax rules in Europe that are intended to prohibit the excessive use of low-tax countries. Our counterfactual scenarios show that this restriction of so-called controlled foreign company (CFC) rules and the related emergence of IP boxes cast doubt on the positive effects the ECJ is assumed to have. Additionally, we show that the abolishment of IP boxes would strengthen tax neutrality in Europe. Overall, further research is needed to relate and harmonise economic and legal concepts of tax neutrality. JEL Classification Code: H21, K10

Should there be lower taxes on patent income?

“…Bräutigam et al (2017) contains a useful discussion of how this impacted the IP boxes Mutti and Grubert (2009). explain how an MNC can mitigate the impact of the US CFC rules.…”

Should there be lower taxes on patent income?

“…Second, following a Court of Justice of the European Union decision in 2006, these rules cannot be applied within the European Economic Area (EU 28 plus Norway, Iceland, and Liechtenstein). Bräutigam et al (2017) contains a useful discussion of how this impacted the IP boxes. Mutti and Grubert (2009) explain how an MNC can mitigate the impact of the US CFC rules.…”

Taxing Intellectual Property in the Global Economy: A Plea for Regulated and Internationally Coordinated Profit Splitting

“…Synthesizing the evidence from 25 studies Heckemeyer et al (2013) conclude that transfer pricing and licensing are the dominant profit-shifting channels. The recent literature therefore focuses increasingly on tax planning with IP (Grubert, 2003;Mutti et al, 2009;Dischinger et al, 2011;Karkinsky et al, 2012;Griffith, Miller, and O'Conell, 2014;Evers et al, 2014;Beer et al, 2015;Evers et al, 2015;Bräutigam et al, 2015;Alstadsaeter et al, 2015;Dudar et al, 2015).…”