Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/229458 
Year of Publication: 
2020
Series/Report no.: 
CESifo Working Paper No. 8640
Publisher: 
Center for Economic Studies and Ifo Institute (CESifo), Munich
Abstract: 
Many countries have introduced patent box regimes in recent years, offering a reduced tax rate to businesses for their IP-related income. Patent boxes are supposed to increase innovative activity, but they are also suspected to aim at attracting inward profit shifting from multinational firms. In this paper, we analyze the effects of patent box regimes when countries can simultaneously use patent boxes and R&D subsidies to promote innovation. We show that when countries set their tax policies unilaterally, innovation is fostered, at the margin, only by the R&D subsidy. The patent box tax rate is instead targeted at attracting international profit shifting, and it is optimally set below the corporate tax rate. With cooperative tax setting, the optimal royalty tax rate is instead equal to, or even above, the statutory corporation tax. Hence, patent box regimes emerge in the decentralized policy equilibrium, but never under policy coordination. Enforcing a nexus principle, as proposed by the OECD, is helpful to mitigate harmful competition for paper profits, but it comes at the price of increased strategic competition in direct R&D subsidies to attract physical R&D units instead of intangible patents.
Subjects: 
R&D investment
patent boxes
investment tax credits
profit shifting
tax competition
JEL: 
H25
H87
F23
Document Type: 
Working Paper
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