Intellectual property box regimes: effective tax rates and tax policy considerations

Abstract

In 2014, 12 European countries are operating Intellectual Property (IP) Box regimes that provide substantially reduced rates of corporate tax for income derived from important forms of intellectual property. We describe the key features of the policies and incorporate them into forward-looking measures of the cost of capital and the effective average tax rate. We show that the treatment of expenses relating to IP income is particularly important in determining the effective tax burden. A key finding is that regimes that allow expenses to be deducted at the ordinary corporate income tax rate, as opposed to the lower IP Box tax rate, may result in negative effective average tax rates and can thereby provide a subsidy to unprofitable projects. We discuss the ways in which IP Boxes are likely to affect firms’ decisions and relate this to possible policy aims. While some regimes attempt to link the tax benefit to real activities, others have designed a policy targeted at the income streams associated with intellectual property. A key concern is the role that IP Boxes may play in increased tax competition between European countries.