Corporate Income Tax, IP Boxes and the Location of R&D

37 Pages Posted: 1 Oct 2021 Last revised: 3 Nov 2021

See all articles by Pranvera Shehaj

Pranvera Shehaj

Vienna University of Economics and Business

Alfons J. Weichenrieder

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy; Vienna University of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: October 23, 2021

Abstract

The paper discusses the effects of the corporate tax on local R&D expenditures by multinational enterprises (MNEs) when income from intellectual property (IP) may or may not benefit from a special IP regime. Our model shows that an increase of the standard corporate tax may have positive effects on the R&D expenditures in the country that carries out the corporate tax increase. The possible positive R&D effect results from a tax asymmetry: not all R&D returns are subject to the higher tax. First, since R&D creates a public good within the MNE, some of the R&D benefit is taxed at other countries’ tax rates that are not subject to the tax increase. Second, some of the R&D benefits are taxed at a lower IP regime tax rate. Therefore, a higher corporate tax, which increases value of the cost deductibility of R&D, may actually foster R&D. This expectation is empirically supported by country-by-country R&D data of U.S.-owned subsidiaries for countries that have an IP regime.

Keywords: corporate income tax, R&D, intellectual property regimes, patent box, international profit shifting

JEL Classification: H25, H26, O3

Suggested Citation

Shehaj, Pranvera and Weichenrieder, Alfons J., Corporate Income Tax, IP Boxes and the Location of R&D (October 23, 2021). WU International Taxation Research Paper Series No. 2021-10, Available at SSRN: https://ssrn.com/abstract=3932968 or http://dx.doi.org/10.2139/ssrn.3932968

Pranvera Shehaj (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Alfons J. Weichenrieder

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy ( email )

United States

HOME PAGE: http://www.uni-frankfurt.de/fb02/weichenrieder/

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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