Intellectual Property Box Regimes: Effective Tax Rates and Tax Policy Considerations

Intangible assets constitute a major input and value-driver for multinational firms. Often, the related intellectual property does not have a clear geographical location and firms use this flexibility to relocate IP and the associated income to low-tax countries in order to reduce their overall tax bill. Consequentially, tax legislators struggle with how to tax income from IP. In this regard, the most significant policy innovation in recent years has been the introduction of Intellectual Property (IP) Box regimes that offer a substantially reduced corporate tax rate for income derived from patents and other forms of IP. In Europe, 11 countries currently offer an IP Box with tax rates varying from 0% in Malta to 15.5% in France.

The contribution of this paper is threefold. First, we provide a comprehensive and systematic overview of the IP Box regimes in place in Europe. We address several aspects of the design of IP Boxes in detail which to date have received little attention, in particular the treatment of expenses related to qualifying income. Second, we incorporate IP Box regimes into effective tax rate measures for investment in a self-developed patent. In doing so, we are able to incorporate features of the tax base, including the treatment of R&D expenses. Third, we discuss IP Box policies’ design features and the incentives they create.

Our survey of IP Box regimes in Europe shows that they broadly fall into two groups. One group (including Belgium, Luxembourg, the Netherlands, and the United Kingdom) has elements that are better targeted at incentivising R&D investment and innovation. Notably, they focus on patents and other trade intangibles and do not apply to acquired IP. The second group (including Cyprus, Hungary, Malta, and the Swiss Canton of Nidwalden) focuses on attracting mobile IP income, in particular by not requiring any original R&D activity on behalf of the taxpayer.

We show that IP Boxes produce substantial reductions in the effective tax burden of profitable investment projects, and in some cases the burden on investment projects that just break even (so called marginal investment). A key finding is that the treatment of expenses relating to IP income is generally more decisive for the effective tax burden than the nominal IP Box tax rate. The treatment of expenses can be sufficiently generous that IP Boxes provide negative effective tax rates, indicating that unprofitable investment projects are subsidised by the regime.

We discuss whether IP boxes are likely to affect real behaviours, specifically the amount and location of R&D investments. We conclude that, when taking into account the large degree of uncertainty associated with new R&D projects, IP Boxes are poorly-targeted at incentivising firms to undertake additional R&D investments. IP Boxes may work to attract mobile investments, and in theory could increase tax revenues. However, any positive effects might be eroded by the operation of similar policies by other countries.

Evers, Lisa, Helen Miller and Christoph Spengel (2013), Intellectual Property Box Regimes: Effective Tax Rates and Tax Policy Considerations, ZEW Discussion Paper No. 13-070, Mannheim.