Discussion of “The Effect of Intellectual Property Boxes on Innovative Activity & Tax Avoidance”

Kaishu WuUniversity of Oregon

Research questions

• Does IP box regime in Belgium increase firms’ patenting activities?

• Does IP box regime make firms’ ETR decrease? (implied question)

• What types of firms reap tax benefits from the IP box regime?

Conclusions

• Belgian firms do not increase patenting activities after the introduction of IP box.

• Belgian firms that hold eligible patents experience a decrease in ETR relative to the firms that do not, a result that is driven by domestic firms and MNEs without income shifting opportunities.

What this study adds

• Another piece of evidence of IP box’s effect on patent innovation, obtained from a cleaner setting (single country, patent income only, big tax cut 33.99% 6.8%)

• Difference-in-difference method addresses omitted variable problems.

• How are the ETRs of different types of firms (multinationals vs. domestics; shifting vs. non-shifting) affected by the IP box regime? (the major contribution).

Comments on the tests for H1

• Is 2008 the best cutoff? When was the announcement date? Was there information leakage prior to the effective date (discussion in the parliament)? I will talk about the placebo test later.

• Controls more than size and leverage – profitability, tangibility, age, competition (may be reflected by industry FE)?

• Interpretation of coefficients in Table 5 – dependent variables are logged values, so logged percentage

• Why is “Reform” negative?• Patent applications do not increase but patent grants do (relative to Germany), what does that

suggest? More favorable granting standards?

Comments on the tests for H2• H2a: firms that hold eligible IP decrease ETR relatively more than firms that do not, after the

introduction of the regime. • Eligible IP: patents commercialized after Jan 1, 2007.• Treated firms: those filing for at least one patent application prior to Jan 1, 2008.• It takes on average 2.5 years for applications to be approved.

• There is a disconnect between hypothesis and identification.

• Does application always lead to approval?• What if an application was approved and commercialized before Jan 1, 2007?• What if an application was approved and commercialized after IP box becomes effective? Are

these firms still valid treated firms?• Treated firms should be those who hold eligible IP before IP box becomes effective (Jan 1, 2008),

and those eligible IPs should be commercialized between Jan 1, 2007 and Dec 31, 2007.• Are actual holding and commercialization statuses not observable?

• Readers would benefit a lot from clarifications with regard to above issues.

Comments on the tests for H2 (continued)

• Do treated firms always have a patent? Do control firms always not have patent? (work against finding your results)

• How to interpret “Reform” being negative, on Table 6? It has the strongest results, on both GAAP ETR and cash ETR. Does it have to do with control firms developing IP after 2008?

Comments on tests for H2 (continued)• H2b: Domestic firms with access to IP box decrease ETR more than MNEs with access to IP box. • H2c: Non-shifting MNEs with access to IP box decrease ETR more than shifting MNEs.

• But where does the additional decrease in ETR come from?

• Is it because domestic firms now pay lower tax on income that was subject to higher tax rate before IP box, whereas MNEs have always paid lower tax on such income that is now eligible for a reduced rate?

• But remember, the reduced rate only applies to newly commercialized patents (it does not apply to patents commercialized before Jan 1, 2007), so the income is new for both domestic and MNEs. In other words, neither firms had paid any tax on such income in the pre-period, because it did not exist.

• Or, is it because domestic firms have higher ETR in pre-period, and having patent-related income subject to a reduced rate added to total income has a greater “diluting effect” on ETR for domestic firms than it is for MNEs?

• Readers would benefit from a distinction between the two.

Comments on tests for H2 (continued)

• Related to the previous comment, are the results consistent with domestic firms having higher ETR in the pre-period?

• Why isn’t the intercept for domestic higher than it is for MNEs?• Why isn’t “Shifting” negative?

Comments on placebo test

• In Table 8, Panel A, why only Belgian firms? Where are the German control firms? What is the treatment? To test the robustness for the results in Table 5, don’t we need the same setting?

Other points• Start sample selection presentation with fewer observations, ignoring those without basic

information (e.g., Total Assets).• German firms don’t have to have ETR to test H1.• Show all the interaction terms that contain variables of interest (Table 7).

Best of luck and Thank you!