The Effect of Intellectual Property Boxes on

Innovative Activity & Tax Avoidance

University of Illinois Tax Doctoral Consortium III

Tobias Bornemann, Stacie Laplante, Benjamin Osswald

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OverviewWhat?

• 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 creditsØU.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

OverviewDo patenting activities increase?

• Patent applications ↑• Patent grants ↑

Which firms decrease their ETRs?• ETR ↓ especially pronounced:

• Domestic firms • Subs of MNEs without income shifting opportunities

LiteratureTheoretically, 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

InnovativeActivities

• Tax credit• Super deduction

Output Incentives

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

Input Incentives

Empirical SettingPrior 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

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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)

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 271,040 271,040 271,040 271,040 271,040 271,040Adj. R2 0.087 0.100 0.072 0.082 0.169 0.189Controls No Yes No Yes No YesIndustry FE Yes Yes Yes Yes Yes Yes

Effective Tax Rates: Hypothesis 2(a-c)

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ETRit = α+γ1 Reformit+ γ2 Treatit+ γ3 Shiftit +…+ γ6 Reformit × Treatitγ7 Reformit × Treatit× Shiftit+ δ Xit+ εit (3)

IP Box Regime

Reform = 1 for 2008 and later

Tax payments

ETRControl variables:

Size, Leverage, Intangibility, ROA, Inventory

IP Box Regime

Reform = 1 for 2008 and later

Tax payments

ETRControl 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 FirmsGAAP 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 FirmsReform x Treatment

-0.022** -0.019* -0.015 -0.008(0.010) (0.011) (0.010) (0.010)

Table 6, Panel C: BE - MNEsReform x Treatment

-0.002 0.009 0.023 0.032(0.019) (0.019) (0.021) (0.022)

Controls No Yes No YesInd. Fixed Effects Yes Yes Yes Yes

Effective Tax Rates: Hypothesis 2(a-b)

H2a

H2b

Effective Tax Rates: Hypothesis 2c

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Table 7, Panel C: Belgian MNEs – AllGAAP 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 5,456Adj. R-squared 0.043 0.133 0.033 0.143Controls No Yes No YesIndustry Fixed Effects Yes Yes Yes Yes

ConclusionWe 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

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

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 SampleN Mean Std. Dev. Q1 Median Q3

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

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

Descriptives

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Table 3, Panel B: Balanced Panel GermanyN Mean Std. Dev. Q1 Median Q3

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

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 0.374Cash ETR . . . . . . . . . .

Size 6,520 10.776 1.598 9.479 10.697

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 0.652Intangibility 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

Inventory6,520 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 Grants6,520 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 0.000SHIFTING 920 0.787 0.410 1.000 1.000 1.000 1,440 0.788 0.409 1.000 1.000 1.000

Patenting Activities: Results Graphs

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Patent Applications Patent Grants

Effective Tax Rates: Hypotheses 2a+b

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Table 6, Panel A: All Belgian FirmsGAAP 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 29,779Adj. R-squared 0.013 0.047 0.045 0.136Controls No Yes No YesInd. Fixed Effects Yes Yes Yes Yes

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Table 6 Panel B: BE - Domestic FirmsGAAP 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 24,323Adj. R2 0.013 0.046 0.049 0.141Controls No Yes No YesInd. FE Yes Yes Yes Yes

Effective Tax Rates: Hypotheses 2a+b

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Table 6 Panel C: BE - MNEsGAAP 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 5,456Adj. R2 0.043 0.132 0.033 0.142Controls No Yes No YesInd. FE Yes Yes Yes Yes

Effective Tax Rates: Hypotheses 2a+b

Effective Tax Rates: Hypothesis 2c

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Table 7, Panel C: Belgian MNEs – AllGAAP 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 5,456Adj. R-squared 0.043 0.133 0.033 0.143Controls No Yes No YesIndustry Fixed Effects Yes Yes Yes Yes

Next Steps

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