Taxation of MNE Profits in an R&D Driven Economy: Beneficial Tax Havens and Minimum Taxes

1 Pages Posted: 28 Dec 2022

See all articles by Malte Lüttmann

Malte Lüttmann

University of Münster - Institute of Public Economics

Date Written: July 12, 2024

Abstract

Research and development (R&D) by multinational enterprises (MNEs) generates substantial positive cross-country spillovers. With R&D incentives primarily provided by the MNEs' host countries, these nations bear the entire cost of incentivising R&D but only reap a fraction of the benefits, resulting in inefficiently low R&D incentives and investment from a global perspective. Allowing MNEs to shift their profit to a tax haven shelters the firms' profit from foreign taxation and increases the net returns to R&D without reducing the domestic tax base. In this setting, tax havens can be welfare beneficial because they help to internalise the positive cross-country spillovers of R&D. The optimal effective minimum tax balances a reduction in wasteful profit shifting and more efficient R&D incentives for MNEs. Regardless of the welfare effect of R&D, a strictly positive minimum tax is optimal for each country. Uncoordinated minimum taxes may be excessively high, if R&D investment has a strong impact on productivity. Under certain circumstances, IP boxes are a welfare-improving substitute for tax havens.

Keywords: Corporate taxation, Intellectual Property, Minimum Tax, Multinational Firms, Optimum Taxation, Patent Box

JEL Classification: H25, H71, F23, O31

Suggested Citation

Lüttmann, Malte, Taxation of MNE Profits in an R&D Driven Economy: Beneficial Tax Havens and Minimum Taxes (July 12, 2024). Available at SSRN: https://ssrn.com/abstract=4307592 or http://dx.doi.org/10.1111/twec.13621

Malte Lüttmann (Contact Author)

University of Münster - Institute of Public Economics ( email )

Wilmergasse 6-8
Muenster, 48143
Germany

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