Host Country Tax Rate，Tax Avoidance，and Innovation of Multinational Enterprises

Abstract

Intangible assets and intellectual capital have become the core of enhancing national scientific and technological competitiveness in recent years. Many countries have adopted measures such as lowering corporate income tax rates and implementing intellectual property tax incentives to encourage the commercialization of innovation outcomes and to attract intangible assets inflow. In this context, the impact of the host country’s tax policies on the innovation activities of MNEs will not only be quantitative incentives, but also may lead to changes in the allocation of R&D activities and intangible assets for tax avoidance purposes.In this paper, we use the 2012-2017 data of the top 500 A-share listed companies in China as a research sample to analyze the impact of host country tax rate on the innovation of Chinese MNEs from the perspective of corporate tax avoidance. The study shows that when the average tax rate of host countries drops, MNEs are likely to transfer R&D investment overseas. And the decrease of innovation caused by tax avoidance behavior is greater than the increase of innovation brought about by R&D funds’ change, thereby reducing the domestic innovation output of MNEs, and ultimately leading to a decrease in their overall innovation output level. In addition, the impact of host country tax rate on the innovation of Chinese MNEs is found to be enhanced by the Patent Box regime and restricted by anti-tax avoidance measures. And this impact is heterogeneous among enterprises of different equity nature and different tax avoidance degree. The results suggest that when designing the tax incentives of innovation, it is necessary to avoid being too different with other countries, so as to reduce the motives of MNEs to engage in tax avoidance behavior. And the anti-tax avoidance rules should be more targeting and with more compatibility with the latest tax incentives. Finally, the implementation of the Patent Box regime should be taken into consideration to enhance the international competitiveness of China’s intellectual property tax system.Compared with the existing literature, the marginal contribution of this paper could be concluded as follows: First, it includes the host country tax rate of MNEs as an influencing factor in the empirical model of corporate innovation, so as to analyze the impact of tax policies in other countries on Chinese MNEs’ innovation from the perspective of corporate tax avoidance, and to further analyze the micro channels of this impact. Second, the innovation output of MNEs overseas is included in the measurement of corporate innovation, so as to fully reflect the innovation activities of MNEs. Third, since the Patent Box regime is not yet adopted in China, it presents for the first time the response of Chinese MNEs’ innovation activities to this tax system.