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

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

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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

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SLIDE 1

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

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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

ØU.S. IP box: cost to taxpayer $9-11 bn. (Merrill et al. 2012) ØCurrent expenditures on R&D tax credits = $11.3 bn.

How?

  • Exploit introduction of IP box in Belgium
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SLIDE 3

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
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SLIDE 4

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)
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SLIDE 5

Tax Incentives for Innovative Activities

Innovative Activities

  • Tax credit
  • Super deduction

Output Incentives

  • IP Box = ↓ tax rate
  • Patents
  • Trademarks
  • Know-How

Input Incentives

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SLIDE 6

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
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SLIDE 7

Patenting Activities: Hypothesis 1

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H1: Firms do not increase their patenting activities after the introduction of the IP box regime.

IP Box Regime

Reform = 1 post 2008

BE = 1 Patenting activities Patent applications, grants and stocks

Control variables: firm size, leverage

Patit =α+λ1 Reform+λ2 BEi + λ3 Reform × BE + θ Yit + εit (1)

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SLIDE 8

Patenting Activities: Results

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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 x BE 0.012** 0.008 0.029*** 0.027***

  • 0.064***
  • 0.073***

(0.005) (0.005) (0.005) (0.005) (0.005) (0.005) 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. R2

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

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SLIDE 9

Effective Tax Rates: Hypothesis 2(a-c)

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ETRit = α+γ1 Reformit+ γ2 Treatit+ γ3 Shiftit +…+ γ6 Reformit × Treatit γ7 Reformit × Treatit× Shiftit+ δ Xit+ εit (3)

IP Box Regime Reform = 1 for 2008 and later Tax payments ETR

Control variables:

Size, Leverage, Intangibility, ROA, Inventory

IP Box Regime Reform = 1 for 2008 and later Tax payments ETR

Control variables:

Size, Leverage, Intangibility, ROA, Inventory

Income shifting opportunities Tax rate differential ETRit = α + β1 Reformit + β2 Treatit + β3 Reformit × Treatit + δ Xit + εit (2)

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Table 6, Panel A: All Belgian Firms GAAP ETR Cash ETR (1) (2) (3) (4) Reform x Treatment

  • 0.022**
  • 0.018**
  • 0.004

0.004 (0.009) (0.009) (0.010) (0.010) Table 6, Panel B: BE - Domestic Firms Reform x Treatment

  • 0.022**
  • 0.019*
  • 0.015
  • 0.008

(0.010) (0.011) (0.010) (0.010) Table 6, Panel C: BE - MNEs Reform x Treatment

  • 0.002

0.009 0.023 0.032 (0.019) (0.019) (0.021) (0.022) Controls No Yes No Yes

  • Ind. Fixed Effects

Yes Yes Yes Yes

Effective Tax Rates: Hypothesis 2(a-b)

H2a H2b

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SLIDE 11

Effective Tax Rates: Hypothesis 2c

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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 x Shifting 0.096** 0.121*** 0.050 0.087 (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

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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
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SLIDE 13

Next Steps

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  • Explore firms entering Belgium after 2007
  • Address limitations of balanced panel
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Thank you for your attention & Looking forward to Your Questions!

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Backup

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Descriptives

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Table 3, Panel A: Balanced Panel Belgium - Full Sample N Mean

  • Std. Dev.

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

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Descriptives

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Table 3, Panel A - BE Treatment Group Control Group N Mean Std. Dev. Q1 Med. Q3 N Mean Std. Dev. Q1 Med. Q3 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

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Descriptives

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Table 3, Panel B: Balanced Panel Germany N Mean

  • Std. Dev.

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

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SLIDE 19

Descriptives

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Table 3, Panel B -DE Treatment Group Control Group N Mean Std. Dev. Q1 Med. Q3 N Mean Std. Dev. Q1 Med. Q3 ETR 6,520 0.288 0.154 0.194 0.292 0.371 20,070 0.283 0.162 0.176 0.291 0.374 Cash ETR . . . . . . . . . . Size 6,520 10.776 1.598 9.479 10.69 7 12.177 20,070 10.034 1.680 8.881 9.959 11.234 Leverage 6,520 0.403 0.216 0.226 0.391 0.558 20,070 0.471 0.235 0.287 0.468 0.652 Intangibility 6,520 0.028 0.063 0.002 0.007 0.021 20,070 0.019 0.054 0.001 0.004 0.012 ROA 6,520 0.125 0.100 0.057 0.098 0.166 20,070 0.113 0.111 0.040 0.082 0.148 Capital Int. 6,520 0.349 0.210 0.187 0.324 0.490 20,070 0.401 0.274 0.156 0.365 0.636 Inventory 6,520 0.638 0.208 0.497 0.660 0.803 20,070 0.585 0.269 0.354 0.622 0.832 Patent App. 6,520 0.909 1.404 0.000 0.000 1.386 20,070 0.003 0.053 0.000 0.000 0.000 Patent Grants 6,520 0.652 1.154 0.000 0.000 1.099 20,070 0.000 0.000 0.000 0.000 0.000 Patent Stock 6,520 2.411 1.806 1.099 2.079 3.497 20,070 0.001 0.031 0.000 0.000 0.000 MNE 6,520 0.141 0.348 0.000 0.000 0.000 20,070 0.072 0.258 0.000 0.000 0.000 SHIFTING 920 0.787 0.410 1.000 1.000 1.000 1,440 0.788 0.409 1.000 1.000 1.000

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Patenting Activities: Results Graphs

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Patent Applications Patent Grants

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Effective Tax Rates: Hypotheses 2a+b

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Table 6, Panel A: All Belgian Firms GAAP ETR Cash ETR (1) (2) (3) (4) Reform

  • 0.020*** -0.010***
  • 0.049***
  • 0.038***

(0.001) (0.001) (0.002) (0.002) Treatment

  • 0.005

0.005

  • 0.041***
  • 0.011

(0.008) (0.008) (0.011) (0.010) Reform x Treatment

  • 0.022**
  • 0.018**
  • 0.004

0.004 (0.009) (0.009) (0.010) (0.010) Constant 0.271*** 0.283*** 0.422*** 0.577*** (0.006) (0.007) (0.025) (0.030) Observations 244,450 244,450 29,779 29,779

  • Adj. R-squared

0.013 0.047 0.045 0.136 Controls No Yes No Yes

  • Ind. Fixed Effects

Yes Yes Yes Yes

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SLIDE 22

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Table 6 Panel B: BE - Domestic Firms GAAP ETR Cash ETR (5) (6) (7) (8) Reform

  • 0.019***
  • 0.010***
  • 0.050***
  • 0.040***

(0.001) (0.001) (0.002) (0.002) Treat

  • 0.005

0.007

  • 0.039***
  • 0.004

(0.009) (0.009) (0.014) (0.012) Reform x Treat

  • 0.022**
  • 0.019*
  • 0.015
  • 0.008

(0.010) (0.011) (0.010) (0.010) Constant 0.270*** 0.287*** 0.432*** 0.603*** (0.006) (0.007) (0.027) (0.032) Obs. 237,630 237,630 24,323 24,323

  • Adj. R2

0.013 0.046 0.049 0.141 Controls No Yes No Yes

  • Ind. FE

Yes Yes Yes Yes

Effective Tax Rates: Hypotheses 2a+b

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SLIDE 23

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Table 6 Panel C: BE - MNEs GAAP ETR Cash ETR (9) (10) (11) (12) Reform

  • 0.043***
  • 0.029***
  • 0.040***
  • 0.029***

(0.004) (0.004) (0.005) (0.004) Treat

  • 0.036**
  • 0.022
  • 0.045***
  • 0.022

(0.017) (0.018) (0.017) (0.019) Reform x Treat

  • 0.002

0.009 0.023 0.032 (0.019) (0.019) (0.021) (0.022) Constant 0.329*** 0.410*** 0.359*** 0.519*** (0.002) (0.022) (0.002) (0.026) Obs. 6,820 6,820 5,456 5,456

  • Adj. R2

0.043 0.132 0.033 0.142 Controls No Yes No Yes

  • Ind. FE

Yes Yes Yes Yes

Effective Tax Rates: Hypotheses 2a+b

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SLIDE 24

Effective Tax Rates: Hypothesis 2c

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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 x Shifting 0.096** 0.121*** 0.050 0.087 (0.040) (0.039) (0.053) (0.066) Constant 0.322*** 0.412*** 0.351*** 0.517*** (0.007) (0.022) (0.008) (0.027)

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

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Next Steps

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ETRs firms that occur in sample after 2007

  • ETRs unbalanced sample