The Effect of Intellectual Property Boxes on Innovative Activity - PowerPoint PPT Presentation

The Effect of Intellectual Property Boxes on Innovative Activity & Tax Avoidance University of Illinois Tax Doctoral Consortium III Tobias Bornemann, Stacie Laplante, Benjamin Osswald 1

Overview What? • Do IP box regimes ↑ firms’ innovative activities? • Which firms respond to IP box regimes? Why? • 2000-2017: 18 countries introduce IP box regimes • ↓ tax rate on specified IP income • Several countries have input incentives, e.g. tax credits Ø U.S. IP box: cost to taxpayer $9-11 bn. (Merrill et al. 2012) Ø Current expenditures on R&D tax credits = $11.3 bn. How? • Exploit introduction of IP box in Belgium

Overview Do patenting activities increase? • Patent applications ↑ • Patent grants ↑ Which firms decrease their ETRs? • ETR ↓ especially pronounced: • Domestic firms • Subs of MNEs without income shifting opportunities

Literature Theoretically , IP boxes = high-powered tax incentives • EATR on marginal R&D investments close to zero or even negative (Evers, Miller and Spengel 2015) Empirically mixed evidence: • ↑ employment, no ∆ in fixed assets, limit income shifting (Chen, De Simone, Hanlon and Lester 2017) • Attract high-value patents for R&D intensive firms (Alstadsaeter, et al. 2015) • Effective for firms with immobile R&D activity (Merrill 2016)

Tax Incentives for Innovative Activities Input Output Innovative Incentives Activities Incentives • IP Box = ↓ tax rate • Tax credit • Super deduction • Patents • Trademarks • Know-How

Empirical Setting Prior literature: cross-country settings • Empirically difficult to isolate effect • ↓ tax rate on income from observable and unobservable intangibles • Data not publicly available Our setting: IP box in Belgium in 2008 • Clean(er) identification • Patent income only • Publicly available data • Large tax rate ↓: 33.99% to 6.8% • All registered taxpayers in Belgium • Strict reporting requirements

Patenting Activities: Hypothesis 1 Pat it = α + λ 1 Reform+ λ 2 BE i + λ 3 Reform × BE + θ Y it + ε it (1) Patenting IP Box Regime activities Patent Reform = 1 post 2008 Control variables: applications, BE = 1 firm size, leverage grants and stocks H1: Firms do not increase their patenting activities after the introduction of the IP box regime. 7

Patenting Activities: Results Table 5, Panel A: ln(Patent Applications) ln(Patent Grants) ln(Patent Stock) (1) (2) (3) (4) (5) (6) Reform -0.011** -0.019*** -0.030*** -0.035*** 0.067*** 0.051*** (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) BE -0.236*** -0.167*** -0.180*** -0.132*** -0.562*** -0.410*** (0.016) (0.013) (0.013) (0.010) (0.027) (0.023) Reform 0.012** 0.008 0.029*** 0.027*** -0.064*** -0.073*** (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) x BE Constant 0.241*** 0.051*** 0.185*** 0.053*** 0.571*** 0.153*** (0.019) (0.017) (0.015) (0.013) (0.032) (0.034) Observations 271,040 271,040 271,040 271,040 271,040 271,040 Adj. R 2 0.087 0.100 0.072 0.082 0.169 0.189 Controls No Yes No Yes No Yes Industry FE Yes Yes Yes Yes Yes Yes 8

Effective Tax Rates: Hypothesis 2(a-c) ETR it = α + β 1 Reform it + β 2 Treat it + β 3 Reform it × Treat it + δ X it + ε it (2) ETR it = α + γ 1 Reform it + γ 2 Treat it + γ 3 Shift it +…+ γ 6 Reform it × Treat it γ 7 Reform it × Treat it × Shift it + δ X it + ε it (3) Income shifting opportunities IP Box Regime IP Box Regime Tax payments Tax payments Tax rate differential Control variables: Control variables: Reform = 1 for Reform = 1 for ETR ETR Size, Leverage, Intangibility, Size, Leverage, Intangibility, 2008 and later 2008 and later ROA, Inventory ROA, Inventory 9

Effective Tax Rates: Hypothesis 2(a-b) Table 6, Panel A: All Belgian Firms GAAP ETR Cash ETR (1) (2) (3) (4) Reform x -0.022** -0.018** -0.004 0.004 H2a Treatment (0.009) (0.009) (0.010) (0.010) Table 6, Panel B: BE - Domestic Firms Reform x -0.022** -0.019* -0.015 -0.008 H2b Treatment (0.010) (0.011) (0.010) (0.010) Table 6, Panel C: BE - MNEs Reform x -0.002 0.009 0.023 0.032 Treatment (0.019) (0.019) (0.021) (0.022) Controls No Yes No Yes Ind. Fixed Effects Yes Yes Yes Yes 10

Effective Tax Rates: Hypothesis 2c Table 7, Panel C: Belgian MNEs – All GAAP ETR Cash ETR (1) (2) (3) (4) Reform -0.033*** -0.009 -0.027** -0.006 (0.013) (0.012) (0.013) (0.013) Treatment -0.013 -0.018 -0.037 -0.029 (0.025) (0.024) (0.027) (0.030) Shifting 0.008 0.000 0.011 0.005 (0.007) (0.006) (0.008) (0.007) Reform x Treatment -0.082*** -0.097*** -0.019 -0.046 (0.027) (0.027) (0.044) (0.060) Reform x Treatment 0.096** 0.121*** 0.050 0.087 x Shifting (0.040) (0.039) (0.053) (0.066) Observations 6,820 6,820 5,456 5,456 Adj. R-squared 0.043 0.133 0.033 0.143 Controls No Yes No Yes Industry Fixed Effects Yes Yes Yes Yes 11

Conclusion We test the effectiveness of IP boxes in • ↑ patenting activities • decreasing firms’ effective tax rates We find: • Patent applications ↑ • Patent grants ↑ • Patent stocks ___ • Significant ↓ in tax rates • ETR ↓ especially pronounced: • Domestic firms • Subs of MNEs without income shifting opportunities

Next Steps • Explore firms entering Belgium after 2007 • Address limitations of balanced panel 13

Thank you for your attention & Looking forward to Your Questions! 14

Backup 15

Descriptives Table 3, Panel A: Balanced Panel Belgium - Full Sample N Mean Std. Dev. Q1 Median Q3 244,450 0.306 0.170 0.222 0.301 0.356 ETR 29,779 0.326 0.167 0.256 0.328 0.372 Cash ETR 244,450 6.709 1.487 5.694 6.503 7.496 Size 244,450 0.481 0.256 0.272 0.488 0.688 Leverage 244,450 0.017 0.067 0.000 0.000 0.000 Intangibility 244,450 0.151 0.137 0.058 0.113 0.197 ROA 244,450 0.271 0.241 0.073 0.199 0.416 Capital Intensity 244,450 0.101 0.160 0.000 0.007 0.152 Inventory 244,450 0.004 0.096 0.000 0.000 0.000 Patent Applications 244,450 0.002 0.066 0.000 0.000 0.000 Patent Grants 244,450 0.013 0.183 0.000 0.000 0.000 Patent Stock 244,450 0.028 0.165 0.000 0.000 0.000 MNE 6,820 0.813 0.390 1.000 1.000 1.000 SHIFTING 16

Descriptives Table 3, Treatment Group Control Group Panel A - BE Std. Std. N Mean Q1 Med. Q3 N Mean Q1 Med. Q3 Dev. Dev. ETR 2,170 0.278 0.146 0.210 0.301 0.346 242,280 0.306 0.170 0.222 0.301 0.356 Cash ETR 1,283 0.276 0.158 0.182 0.299 0.351 28,496 0.328 0.167 0.259 0.329 0.373 Size 2,170 9.418 1.977 7.873 9.342 10.827 242,280 6.685 1.459 5.687 6.491 7.470 Leverage 2,170 0.503 0.235 0.325 0.509 0.685 242,280 0.481 0.256 0.272 0.488 0.688 Intangibility 2,170 0.017 0.050 0.000 0.001 0.009 242,280 0.017 0.067 0.000 0.000 0.000 ROA 2,170 0.129 0.112 0.052 0.097 0.174 242,280 0.151 0.137 0.058 0.113 0.198 Capital Int. 2,170 0.183 0.153 0.057 0.157 0.265 242,280 0.272 0.241 0.074 0.199 0.418 Inventory 2,170 0.155 0.152 0.025 0.122 0.235 242,280 0.100 0.160 0.000 0.007 0.151 Patent App. 2,170 0.450 0.886 0.000 0.000 0.693 242,280 0.001 0.021 0.000 0.000 0.000 Patent Grants 2,170 0.259 0.656 0.000 0.000 0.000 242,280 0.000 0.000 0.000 0.000 0.000 Patent Stock 2,170 1.483 1.262 0.693 1.386 2.079 242,280 0.000 0.011 0.000 0.000 0.000 MNE 2,170 0.189 0.392 0.000 0.000 0.000 242,280 0.026 0.160 0.000 0.000 0.000 SHIFTING 410 0.841 0.366 1.000 1.000 1.000 6,410 0.811 0.391 1.000 1.000 1.000 17

Descriptives Table 3, Panel B: Balanced Panel Germany N Mean Std. Dev. Q1 Median Q3 26,590 0.284 0.160 0.181 0.291 0.373 ETR . . . . . . Cash ETR 26,590 10.216 1.691 8.999 10.134 11.504 Size 26,590 0.454 0.233 0.270 0.448 0.630 Leverage 26,590 0.021 0.056 0.001 0.004 0.014 Intangibility 26,590 0.116 0.109 0.044 0.086 0.153 ROA 26,590 0.388 0.261 0.164 0.352 0.596 Capital Intensity 26,590 0.598 0.256 0.394 0.634 0.824 Inventory 26,590 0.225 0.799 0.000 0.000 0.000 Patent Applications 26,590 0.160 0.636 0.000 0.000 0.000 Patent Grants 26,590 0.592 1.369 0.000 0.000 0.000 Patent Stock 26,590 0.089 0.284 0.000 0.000 0.000 MNE 2,360 0.788 0.409 1.000 1.000 1.000 SHIFTING 18