Taxation of Knowledge-Based Capital: Some Additional Issues for Policymakers' Considerations

25 Pages Posted: 2 Feb 2017

See all articles by Alessandro Modica

Alessandro Modica

Government of the Italian Republic (Italy) - Department of Finance

Thomas S. Neubig

Tax Sage Network

Date Written: November 12, 2016

Abstract

This paper extends the tax analysis of knowledge-based capital (KBC) in several dimensions. The paper analyses non-R&D KBC: computer software, architectural and engineering designs, and economic competencies that account for over 70% of total KBC. The paper analyses the tax treatment of internally-developed KBC which is used in production by the developer versus KBC sold to third-party producers. The current tax rules generally favor internally-developed KBC, which disadvantages many SMEs and start-up companies specializing in innovation. The analysis reports two average effective tax rates (ETRs) depending on investors’ considerations of their investment opportunities. When KBC is unique, earns excess returns due to market power, or involves financing-constraints, ETRs are high despite immediate expensing. The paper also analyses the effects of tax limitations, where many SMEs and start-up companies can’t benefit from tax credits and deductions until having sufficient tax liability.

Keywords: tax, marginal effective tax rate, effective tax rate, knowledge-based capital, KBC, SME

JEL Classification: G38, H25

Suggested Citation

Modica, Alessandro and Neubig, Thomas S., Taxation of Knowledge-Based Capital: Some Additional Issues for Policymakers' Considerations (November 12, 2016). Available at SSRN: https://ssrn.com/abstract=2909409 or http://dx.doi.org/10.2139/ssrn.2909409

Alessandro Modica

Government of the Italian Republic (Italy) - Department of Finance ( email )

via Pastrengo, 22
Rome, 00185
Italy

Thomas S. Neubig (Contact Author)

Tax Sage Network ( email )

101 Harbourview Drive
Locust Grove, VA 222508
United States

HOME PAGE: http://www.taxsagenetwork.com

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