Corporate Taxation and the Choice of Patent Location within Multinational Firms

37 Pages Posted: 9 Jan 2010

See all articles by Tom Karkinsky

Tom Karkinsky

affiliation not provided to SSRN

Nadine Riedel

Oxford University CBT; University of Hohenheim

Date Written: December 2009

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 Foreign Company’ rules tend to decrease the number of patent applications.

Keywords: corporate taxation, multinational enterprise, profit shifting

JEL Classification: H25, F23, H26, C33

Suggested Citation

Karkinsky, Tom and Riedel, Nadine, Corporate Taxation and the Choice of Patent Location within Multinational Firms (December 2009). CESifo Working Paper Series No. 2879. Available at SSRN: https://ssrn.com/abstract=1532668

Tom Karkinsky

affiliation not provided to SSRN ( email )

Nadine Riedel (Contact Author)

Oxford University CBT ( email )

Park End Street
Oxford, Oxfordshire OX1 1HP
United Kingdom

University of Hohenheim ( email )

Stuttgart
Germany

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