Effective Tax Rates Under IP Tax Planning

50 Pages Posted: 27 Jan 2015

See all articles by Lisa Evers

Lisa Evers

ZEW – Leibniz Centre for European Economic Research

Christoph Spengel

Centre for European Economic Research (ZEW)

Date Written: November 10, 2014

Abstract

Tax planning with intangibles has become one of the most popular and most vividly debated topics in international taxation. We incorporate various intellectual property (IP) tax planning models into forward-looking measures of effective tax rates, namely the disposal of intangibles to low-tax subsidiaries, intra-group licensing arrangements, and intra-group contract R&D. In doing so, we draw upon the methodology put forward by Devereux and Griffith and amend this model by considering a research & development (R&D) investment which is carried out by a parent company, whereby the resulting intangible is exploited by a foreign subsidiary. We point out analytically under which conditions IP tax planning achieves the objective of reducing the effective average tax rate of the group. We find that the disposal of intangibles to low-tax subsidiaries does not achieve this tax planning objective, if the true value of the asset is subject to tax upon the disposal. We show to what extent the parent must understate the value of the intangible in order to reduce the group’s tax burden. We furthermore point out that contract R&D may generally achieve a significant lower effective tax burden. We present cost of capital and effect average tax rates to illustrate these findings.

Keywords: corporate taxation, effective tax rate, tax planning, profit shifting, transfer pricing, intellectual property, intangible assets, contract R&D

JEL Classification: F23, H25, H32, H87, K34

Suggested Citation

Evers, Lisa and Spengel, Christoph, Effective Tax Rates Under IP Tax Planning (November 10, 2014). ZEW - Centre for European Economic Research Discussion Paper No. 14-111, Available at SSRN: https://ssrn.com/abstract=2555488 or http://dx.doi.org/10.2139/ssrn.2555488

Lisa Evers (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Christoph Spengel

Centre for European Economic Research (ZEW) ( email )

D-68161 Mannheim
Germany

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