IP Boxes.

AuthorBrannon, Ike

* "IP Boxes and the Activities of Foreign-Owned U.S. Corporations," by Tim Dowd, Paul Landefeld, and Anne Moore. Joint Committee on Taxation working paper, 2020.

An "intellectual property box" (or IP box) is a preferential tax rate regime for income accruing to intellectual property such as royalties from patents. The rationale for an IP box is simple: if mobile capital can escape a country's tax jurisdiction easily while fixed capital cannot, then it may make sense for the country to tax the return to mobile capital less heavily than fixed capital.

IP boxes have been around in some form for at least a decade, and there are over 20 countries with IP boxes (which these days are more often referred to as "innovation boxes") across the world. Many of the EU countries, as well as China, employ some form of one. They vary widely in terms of qualifying income and rates.

The Joint Committee on Taxation staffers who wrote this paper want to know how foreign IP boxes affect the real economic activity of multinational firms. Knowing that would help U.S. policymakers better understand the efficacy of our own tax policy. Because countries adopted IP boxes in different years, the authors used a difference-in-differences approach to estimate the effect the tax policies had on sales, wages, and investment of multinational firms in the United States.

There are two ways a U.S.-based multinational could react to the creation of an IP box in a different country. First, the corporation could transfer activity currently done in the United States to the IP-box country. For instance, some pharmaceutical companies have indicated that Switzerland's generous IP box is why they (re)located research and development there. This is more than a simple "P.O. Box" change; it is a boost in investment in the firms' Switzerland operations at the expense of operations elsewhere.

But that substitution effect may bring with it a scale effect: a firm may react to the reduction in its worldwide tax bill from the IP box by increasing economic activity both in the IP-box country and in the rest of the world. In other words, while an IP box encourages more capital investment in the country that implements one, it may also boost economic activity at company locations around the world. The result is that countries that don't implement an IP box may lose tax revenue but not much overall economic activity.

The paper notes that while it may seem intuitive that the substitution effect...

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