Taxing Royalty Payments

23 Pages Posted: 17 Sep 2016

See all articles by Steffen Juranek

Steffen Juranek

Norwegian School of Economics (NHH) - Department of Business and Management Science

Dirk Schindler

Erasmus School of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Guttorm Schjelderup

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: March 21, 2016

Abstract

The digital economy is characterized by the use of intellectual property such as software, patents and trademarks. The pricing of such intangibles is widely used to shift profits to low-tax countries. We analyze the role of a source tax on royalty payments for abusive transfer pricing, and optimal tax policy. First, we show that mispricing of royalty payments does not affect investment behavior by multinationals. Second, it is in the vast majority of cases not optimal for a government to set the source tax equal to the corporate tax rate. The reason is that shutting down abusive transfer pricing activities needs to be traded off against mitigating the corporate tax distortion in capital investment. The latter can be achieved by some tax deductibility of royalty payments. If the true arm's length transfer price equals zero or for special corporate tax systems that treat debt and equity alike (i.e., for ACE and CBIT), it will be optimal to equate both tax rates.

Keywords: Royalty taxation, intellectual property, multinationals, profit shifting

JEL Classification: F23, H21, H25

Suggested Citation

Juranek, Steffen and Schindler, Dirk and Schjelderup, Guttorm, Taxing Royalty Payments (March 21, 2016). NHH Dept. of Business and Management Science Discussion Paper No. 2016/16. Available at SSRN: https://ssrn.com/abstract=2839756 or http://dx.doi.org/10.2139/ssrn.2839756

Steffen Juranek (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Dirk Schindler

Erasmus School of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Guttorm Schjelderup

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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