Attracting profit shifting or fostering innovation? On patent boxes and R&D subsidies

Abstract

Many countries have introduced patent box regimes in recent years, offering a reduced tax rate to businesses for their IP-related income. In this paper, we analyze how countries set optimal policies when both patent box regimes and R&D subsidies can be used to promote innovation. We show that patent box regimes emerge endogenously under policy competition, but never under policy coordination. Also, a partial tax coordination that abolishes patent box regimes but retains competition in corporate tax rates and R&D subsidies is welfare-improving in most cases. In this setting, policy competition is shifted to R&D subsidies, which cannot be used to attract profit shifting. Finally, we compare the competition for mobile patents with the competition for mobile R&D units and show that enforcing a nexus principle is likely to reduce the aggressiveness of patent box regimes.