Taxation, R&D Tax Incentives and Patent Application in Europe

Innovation triggers positive effects on productivity and growth. It is therefore important to know whether taxation has an impact on research, development and innovation and whether taxation can be used as an instrument to foster research, development and innovation. Moreover, the generated intellectual assets can also increase the fiscal tax revenue. We add to the literature by analysing simultaneously effects from R&D tax incentives and corporate income tax burden on R&D investment and patenting behaviour of European corporations. We generate and use a panel of firm-specific patent applications at the European Patent Office (EPO) from 1998 to 2007. We find positive effects of R&D tax incentives on the probability to invest in R&D in the R&D phase. The marginal effect is an 11% increase of the odds ratio for a ten percentage point decrease of the B-Index equaling the introduction of a 10% tax credit on R&D expenditures. R&D tax incentives seem to increase the tendency of rather small firms to start investing in R&D. We find a negative effect of the combined statutory corporate income tax rate on the number of patent applications. The marginal effect is estimated as an increase of the average count of applications by 0.09 for a decrease of the corporate income tax rate of ten percentage points. The effect in countries with R&D tax incentives is 156% larger indicating a stronger sensitivity to tax issues. The effect of the corporate income tax rate is 120% larger for inventions that were developed in cooperation with foreign inventors. Those cooperations seem to provide better opportunities for tax planning with IP ownership. Moreover, we find a marginal effect which is about 189% higher for firms with more than 5,000 employees. Larger firms have more options and more available locations in different countries to structure R&D phase and IP phase tax-efficiently with regard to the overall tax burden. A fiscal instrument to foster R&D activity in the own country could be the use of R&D tax incentives, which we found to have a positive effect on the probability to invest in R&D, especially for smaller firms. Another option would be to lower the corporate income tax rate which we found to increase patent applications and, also, earlier R&D investments in that specific country.

Ernst, Christof and Christoph Spengel (2011), Taxation, R&D Tax Incentives and Patent Application in Europe, ZEW Discussion Paper No. 11-024, Mannheim.