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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Public Economics, Volume 112, April 2014, Pages 12–23
Intellectual property accounts for a growing share of firms' assets. It is more mobile than other forms of capital, and could be used by firms to shift income offshore and to reduce their corporate income tax liability. We consider how influential corporate income taxes are in determining where firms choose to legally own intellectual property. We estimate a mixed (or random coefficients) logit model that incorporates important observed and unobserved heterogeneity in firms' location choices. We obtain estimates of the full set of location specific tax elasticities and conduct ex ante analysis of how the location of ownership of intellectual property will respond to changes in tax policy. We find that recent reforms that give preferential tax treatment to income arising from patents are likely to have significant effects on the location of ownership of new intellectual property, and could lead to substantial reductions in tax revenue.
The growing importance of intellectual property as a factor in production,1 and concern that it is easier for firms to shift income from this source than it is from others, presents challenges for tax design. Firms can and do position their intellectual property with a view to reducing tax liabilities. However, despite these concerns, firms do not by and large locate the legal ownership of intellectual property in the lowest tax countries, and corporate income taxes still raise considerable amounts of revenue in most developed countries. In this paper we address the question of how influential corporate income taxes are in determining where firms choose to legally register ownership of an important form of intangible assets, patents. Our contribution is to extend the empirical literature on public policy and firm location choice by introducing new methods to this area of public economics. We estimate a mixed (or random coefficients) logit model that incorporates both observed and unobserved heterogeneity in firms' location choices (see inter alia, Berry et al., 1995 and Berry et al., 2004, Nevo (2001) and Train (2003)). A key strength of this approach is that it allows us to compute own and cross tax elasticities across locations that reflect patterns of correlation in observed choices in the data, and therefore to capture more realistic substitution patterns than standard logit models. Our estimates allow us to conduct ex ante analysis of how the location of ownership of intellectual property will respond to changes in policy. We use our estimates to simulate responses to recent policy reforms that provide preferential tax treatment to income arising from patents. We find that these reforms are likely to have significant effects on the location of ownership of new intellectual property, and could lead to substantial reductions in tax revenue. Our estimates could be used to simulate a wide range of other counterfactual situations. We use comprehensive panel data on all patent applications made to the European Patent Office (EPO) by a large number of innovative European firms over 1985–2005. A patent is a legal document that grants a firm the exclusive rights to use or licence a novel technology for a specified period of time. A firm can register legal ownership of a patent in a subsidiary that is located in a country different to the firm's headquarters, different to the location where the underlying technology was created and different to the location where the intellectual property will be applied. Lipsey (2010) notes that, in multinational firms, intangible assets “have no clear geographical location, but only a nominal location determined by the parent company's tax or legal strategies.” For example, Fig. 1 shows the share of patent applications made by UK parent firms where the legal ownership is registered outside of the UK and in a separate place to where the underlying innovative activity occurred. This share has increased six-fold over the past two decades. The largest proportion has gone to countries that have a lower tax rate than the UK, but the amount going to countries with a higher tax rate has also increased. Full-size image (42 K) Fig. 1. Share of patent applications made by subsidiaries of UK parent firms that are located offshore and separately from innovative activity. Notes: The bars show the share of total patent applications made by subsidiaries of UK parent firms where the subsidiary is located outside of the UK, and is not in a country where associated innovative activity was carried out. Low (high) tax countries are defined as those locations that have a statutory tax rate less (greater) than the UK. Figure options We model the impact of tax on where firms choose to locate the legal ownership of patents. Tax could influence this decision because the legal ownership of the patent will be one of the determinants of where the income derived from the patent is taxed. The profits earned from the exploitation of intellectual property will be the result of a number of activities, including the research and development (R&D) investment undertaken to create the new idea, the financing of this investment and the subsequent commercialisation. When these activities take place in multiple countries, as is often the case for multinational firms, the returns must be allocated to individual jurisdictions for tax purposes. Firms have an incentive to arrange their activities in such a way that, all else equal, profits accrue in the country in which they would pay the lowest tax. There are a number of strategies that can be used to achieve this. Such strategies commonly require that the income earned from exploiting intellectual property accrues outside of the country in which the underlying R&D took place. One way to achieve this is through contract R&D. For example, a subsidiary in a relatively low tax country may finance (and bear the risk for) R&D activities that are contracted to a related subsidiary in a higher tax country (possibly with the benefit of R&D tax incentives and access to high skills levels). The contract will specify the payment to be made for the R&D activities (commonly equal to the costs incurred plus an arm's length mark-up). Returns above this payment, either from using the technology directly or from licensing it, will accrue to the subsidiary that bore the financial risk. There is a tax advantage to this strategy if the true value of the R&D activities is less than the price paid for the contract R&D. A similar result may be achieved through the use of a cost sharing agreement that specifies how subsidiaries will share the costs, risks and returns associated with an R&D project. Such agreements may be designed such that the right to exploit and capture the returns from a technology accrues to a subsidiary in a low tax country. The strategies available to a firm depend on how the firm is organised and on the precise tax rules they are subject to (Finnerty et al. (2007)). Tax rules limit a firm's ability to manipulate where income arises for tax purposes. Shifting income typically requires that payments made to compensate the company that conducts the R&D, or royalties made for the use of a technology, are at preferential prices. There are transfer pricing rules that aim to enforce the principle that the prices of intra-firm transactions are set as if they had occurred between unrelated parties — this is the arm's length principle. However, these transactions often do not have market counterparts, which means that firms may have opportunities to set the prices of related transactions in such a way as to reduce tax liability.2 Tax rules, including those that dictate how a firm can allocate the returns to innovative activities, differ across European countries and are different to those faced by US multinationals. For example, countries differ on the acceptable methods used to calculate payments for contracted R&D services, and where there are cost sharing agreements, countries differ in the requirements over whether all subsidiaries involved in the agreement need be engaged in R&D (in contrast to the US, not all European countries allow holding companies in low tax locations to be part of cost sharing agreements). The corporate tax rate is likely to be an important determinant of the location in which a firm chooses to hold legal ownership of intellectual property. However, it is unlikely to be the only factor; we would not expect all intellectual property to be legally registered in the lowest tax countries. Indeed, legal ownership of patents is rarely in the set of small countries that are often considered to be tax havens. The patents that are legally owned in such countries accounted for fewer than 0.5% of all patent applications made to the European Patent Office over the period 2001–2005, and many of those are unrelated to European firms.3 This could be due, at least in part, to the operation of Controlled Foreign Company (CFC) regimes, which effectively seeks to tax income at the higher home country tax rate if it is deemed to be located in a low tax country for tax purposes. More generally, there may be characteristics of a location over and above its corporate tax rate that firms value. For example, the strength of intellectual property rights protection and market size might play a role, and, all else equal, firms may be more likely to co-locate ownership of intellectual property with associated real innovative activity due to externalities from co-location. There is likely to be a large degree of heterogeneity in how responsive firms are to tax when deciding where to locate the legal ownership of their intellectual property; a number of papers have emphasised the importance of incorporating heterogeneity in firms' decisions (Melitz (2003), Bernard et al., 2007a and Bernard et al., 2007b, Krautheim and Schmidt-Eisenlohr (2011)). This heterogeneity will arise for a number of reasons, some of which relate to observable factors, and others that relate to factors unobserved by the econometrician. For example, firms are likely to be more sensitive to tax when choosing the location in which to legally own patents with a relatively high expected value (Becker and Fuest (2007), Bohm et al. (2012)). Firms are also likely to be differentially responsive to tax due to differences in their organisational structures. Their existing network of subsidiaries, the proficiency of their tax department and the tax strategies they are able to employ for managing income from intellectual property will play a role. Firms with headquarters in different countries might respond differently if countries differ in the stringency of their tax rules and in the effectiveness with which they are applied. Firms operating in some markets or using certain technologies might respond differently, because, for example, transfer pricing rules may be easier to circumvent for firms operating in markets where a high share of transactions are intra-firm meaning it is difficult for tax authorities to accurately assess what is a fair market price. Both firm size and industry have been highlighted as important in the context of firm decision making over how to organise offshore activities (Graham and Tucker (2006) and Desai et al. (2006)). Indeed, the value of a patent, the relative attractiveness of a location and a firm's strategies and organisational structures are likely to vary across industries and, within industries, across firms. Our work relates to several papers in the literature. Most closely related, Dischinger and Riedel (2011) and Karkinsky and Riedel (2012) estimate the relationship between corporate tax and, respectively, the quantity of intangible assets and the number of patent applications made by subsidiaries located in each of a number of European countries. Also related is Ernst and Spengel (2011) who estimate the impact of R&D tax incentives and corporate tax on patenting. In common with these papers, we are interested in the relationship between corporate tax and where firms choose to locate intellectual property. We extend this literature by estimating a choice model that allows us to compute the full set of own tax and cross tax elasticities and which allows us to carry out ex ante analysis of how location decisions will respond to potential policy changes. Our work is also related to Cohen (2012), which uses a discrete choice framework to study how the design of US state tax rules influence US firms' decisions over in which state to incorporate. There is a considerable literature in the Hall and Jorgenson (1967) tradition that considers the impact of taxes on production activity and on the location of R&D. Hines, 1996 and Hines, 1999 and Devereux (2006) provide surveys of the empirical literature. This literature finds that, despite the many factors that will influence a firm's location decision, tax exerts a significant effect on location choices. Hines and Jaffe (2001) show that tax affects the location of firms' innovative activities within US multinational groups. Most relevant for our analysis, previous work has highlighted the role that intangible assets play in allowing firms to organise their activities with a view to reducing their tax burden (Altshuler and Grubert (2006)). Empirical studies provide indirect evidence of tax avoidance by, for example showing that firms have relatively high profitability in low tax countries (Grubert and Mutti (1991), Hines and Rice (1994)) and that the share of royalty payments associated with low tax countries is higher than expected (Grubert and Mutti (2009)). Grubert (2003) formalises how intangible assets can be used to shift income and finds that about half of the income shifted from high-tax to low-tax countries by US manufacturing firms can be accounted for by income from R&D linked intangibles. The structure of the paper is as follows. In Section 2 we outline a model of a firm's decision over where to locate the legal ownership of a patent. In Section 3 we describe the data we use to estimate the model. Section 4 presents the estimated coefficients and the tax elasticities between locations. An example of how the model can be used to conduct policy simulations is given in Section 5, where we consider the impact of recent reforms that reduce the tax rate for income derived from patents. A final section summarises and concludes.
نتیجه گیری انگلیسی
The literature has emphasised the downward pressure on corporate income tax rates that arises from factor mobility. There is also a large literature that discusses the strategies firms use to shift income for tax purposes and to circumvent anti-avoidance rules, and that highlights an important role for intangible assets. However, we know relatively little about the extent to which the location of intangible assets responds to tax. The evidence there is on the impact of tax on the location of capital more generally has tended to suffer from the imposition of restrictive a priori assumptions placed on the underlying model of firm behaviour. From a policy perspective it is clearly important to understand how responsive firms are to corporate income taxes when they make location decisions. In this paper, we estimate a model of firms' decisions over where to locate the legal ownership of their patents. We find that corporate tax rates are an important determinant of location choice. We extend the current literature on the determinants of firm location choice by estimating a flexible choice model, which accounts for both observed and unobserved heterogeneity in behaviour. We are able to generate own and cross tax elasticities across locations that capture complex patterns of substitution in the data. The model can be used to conduct ex ante analysis of policy changes. We find that this heterogeneity is important for explaining location choices. Our model also shows that other factors influence where firms choose to hold legal ownership of patents. For instance, firms are more likely to locate patent ownership in countries where they have associated real innovative activity. This may reflect co-location externalities, or the influence of tax rules which seek to limit the extent to which income and real innovative activity can be geographically separated. Firms also value other non-tax location characteristics. Such factors, along with tax rules like the operation of CFC regimes that limit the tax advantages of locating patent ownership in low tax jurisdictions, help explain why we do not see firms choosing to hold all legal ownership of patents in the lowest tax locations. We use the model to consider the impact of the recent introduction of preferential tax regimes for income from patents. These Patent Boxes are likely to attract patent income, but our estimates suggest that they will also lead to substantial falls in tax revenues. Of course some of this revenue loss might be offset by gains from attracting activities that yielded positive externalities; these would need to be taken into account in a calculation of the welfare impact of the policy. It is also possible that the tax reforms will affect firms' decisions over whether to apply for a patent on a new technology or whether to rely on secrecy. We do not have information that would allow us to directly estimate this margin, but this would be an interesting avenue for future research. The introduction of Patent Boxes by several European countries in a relatively short space of time has given rise to concerns that countries are engaging in tax competition for patent income. In future work we intend to build on the framework developed here to consider whether governments are engaged in a strategic game to attract income from intellectual policy that ultimately will continue to exert downward pressure on corporate taxes.