Pages: 55 (13592 mots) Publié le: 20 février 2011
Corporate Taxation and the Choice of Patent Location within Multinational Firms

Tom Karkinsky Nadine Riedel

An electronic version of the paper may be downloaded • from the SSRN website: • from the RePEc website: • from the CESifo website:

CESifo Working PaperNo. 2879

Corporate Taxation and the Choice of Patent Location within Multinational Firms
Corporate patents are perceived to be the key profit-drivers in many multinational enterprises (MNEs). Moreover, as the transfer pricing process for royalty payments is often highly intransparent, they also constitute a major source of profit shifting opportunities between multinational entities.For both reasons, MNEs have an incentive to locate their patents at affiliates with a relatively small corporate tax rate. Our paper empirically tests for this relationship by exploiting a unique dataset which links information on patent applications to micro panel data for European MNEs. Our results suggest that the corporate tax rate (differential to other group members) indeed exerts anegative effect on the number of patents filed by a subsidiary. The effect is quantitatively large and robust against controlling for affiliate size. The findings prevail if we additionally account for royalty withholding taxes. Moreover, binding ‘Controlled Foreign Company’ rules tend to decrease the number of patent applications. JEL Code: H25, F23, H26, C33. Keywords: corporate taxation, multinationalenterprise, profit shifting.

Tom Karkinsky Oxford University CBT Said Business School Park End Street UK – Oxford, OX1 1 HP United Kingdom

Nadine Riedel Oxford University CBT Said Business School Park End Street UK – Oxford, OX1 1 HP United Kingdom

November 3, 2009 We are indebted to the Institute for Fiscal Studies (IFS), especiallyto Rachel Griffith and Helen Miller, for providing us access to the dataset used in this paper and for several helpful comments. Moreover, we thank Wiji Arulampalam, Steven Bond, Mihir Desai, Michael Devereux, Clemens Fuest, Rick Krever and participants of seminars at the University of Oxford for helpful comments and suggestions.



Anecdotal evidence suggests thatmultinational companies strategically locate ownership of their intellectual property at tax-havens, with the intention of minimizing their corporate tax burden. For example, the Wall Street Journal reports that Microsoft, a company which earns three-fourths of its revenue from license fees, is “increasingly setting up units in Ireland that route intellectual property and its financial fruits to the low-taxhaven” (Wall Street Journal, 2005). In the UK, the Guardian writes that “three FTSE 100 companies have quietly transferred their valuable intellectual property to low-tax locations”, meaning that “they can reduce their UK-based profits and hence their British tax bills” (The Guardian, 2009). The rationale behind locating intellectual property at low-tax affiliates is two-fold. First, intangibleassets are increasingly perceived to be important value-drivers within multinational enterprises (MNEs) (e.g. see Hall, 2001, Zingales, 2000). Locating them at low-tax affiliates is thus an attractive tax saving strategy as it implies that the intangibles’ profits become taxable at a low corporate tax rate. Second, the common good nature of intellectual property involves that it is used as an input factorby several operating affiliates within the multinational group which then pay a royalty or license fee to the intangibles-owner (see e.g. Markusen, 1995). As arm’s length-prices for these firm-specific royalty payments are commonly not available to tax authorities, MNEs can distort royalty prices in order to shift profit between the operating entities and the intangibles-owner. Consequently, it pays...
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