Taxation of MNE Profits in an R&D Driven Economy: Beneficial Tax Havens and Minimum Taxes
29 Pages Posted: 28 Dec 2022
Date Written: December 20, 2022
Abstract
In this paper, I consider optimal minimum taxation and the optimal taxation of intellectual property (IP) income in a setting, in which research and development (R&D) activities of multinational enterprises (MNEs) are suboptimally low due to positive cross-country spillovers resulting from R&D activity by MNEs. The R&D incentives set by an MNE's host country are inefficiently low in equilibrium. Allowing MNEs to access tax havens may help to overcome the resulting inefficiency because it shelters the MNEs' profit from foreign taxation. This forces foreign countries to contribute to the R&D incentive for domestic MNEs. In such settings, effective minimum taxes serve as a tool to fine-tune tax haven access. 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
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