Evaluating the innovation box tax policy instrument in the Netherlands, 2007–13

Abstract

Patent boxes are tax incentive schemes aimed at stimulating research and development (R&D) in firms by providing favourable tax rates to profits that can be linked to a specific immaterial asset, such as a patent. Because these profits are often hard to separate from other firm profits, patent boxes have been argued to be prone to tax shifting of firms, and tax competition between nations, as they might shift the location of the profits without affecting the location of R&D activities. Whether or not this occurs may also depend on conditions set in the patent box. We evaluate the innovation box policy instrument in the Netherlands, which is essentially a patent box, but without the formal requirement of a patent. We ask whether the innovation box has an effect on local R&D investment of the firm (‘additionality’), thereby putting the hypothesis of tax shifting to the test. We find that the innovation box indeed has a positive effect on R&D investment, but the average firm that uses the policy tends to use only a part of the tax advantage for extra R&D investment.