Working Paper

Tax Systems Analysis

Thomas Schwab, Maximilian Todtenhaupt

2017/15: Spillover from the haven: cross-border externalities of patent box regimes within multinational firms

In this paper, we analyze the cross-border effects of patent box regimes that reduce the tax rate on income from intellectual property. We argue that the tax cut in one location of a multinational enterprise may reduce the user cost of capital for the whole group if profit shifting is possible. This spillover effect of the foreign tax cut raises domestic R&D investment. We test this mechanism by combining information on patents, firm ownership and specific characteristics of patent box regimes. Empirical results from a micro-level analysis suggest that patent box regimes without a nexus requirement (patent havens) induce positive cross-border externalities on R&D activity within multinational groups. For firms with cross-border links, the implementation of a foreign patent haven increases domestic research activity by about 2.3% per implied tax rate differential. Furthermore, our findings suggest that patent boxes generate negative spillovers on average patent quality. This has important implications for international tax policy and the evaluation of patent box regimes.