(Un)Intended Effects of Preferential Tax Regimes

Patent boxes have become an increasingly popular tax instrument in the European Union and the US to attract mobile tax bases of multinational enterprises (MNEs) as well as to foster productivity. The paper presented in this ZEW Research Seminar estimates the size of the (un)intended effects of the new preferential tax regime, which grants a reduction in the tax burden on income from intellectual property. The author shows that MNE affiliates that can benefit from the preferential regime report 8.5 percent higher profits. The profit change splits up into a profit shifting and a productivity effect in proportions 2/3 and 1/3. Surprisingly, the profit shifting effect includes an unintended, reversed profit shifting out of the affiliate. Contrary to expectation, the overall tax base adjustment might lower tax revenues collected from MNEs.