Ownership of intellectual property and corporate taxation

Rachel Griffith,Helen Miller,Martin O'Connell

doi:10.1016/j.jpubeco.2014.01.009

Abstract

Intellectual property accounts for a growing share of firms' assets. It is more mobile than other forms of capital, and could be used by firms to shift income offshore and to reduce their corporate income tax liability. We consider how influential corporate income taxes are in determining where firms choose to legally own intellectual property. We estimate a mixed (or random coefficients) logit model that incorporates important observed and unobserved heterogeneity in firms' location choices. We obtain estimates of the full set of location specific tax elasticities and conduct ex ante analysis of how the location of ownership of intellectual property will respond to changes in tax policy. We find that recent reforms that give preferential tax treatment to income arising from patents are likely to have significant effects on the location of ownership of new intellectual property, and could lead to substantial reductions in tax revenue.

Highlights

The growing importance of intellectual property as a factor in production,1 and concern that it is easier for firms to shift income from this source than it is from others, presents challenges for tax design
In this paper we address the question of how influential corporate income taxes are in determining where firms choose to legally register ownership of an important form of intangible assets, patents
We find that these reforms are likely to have significant effects on the location of ownership of new intellectual property, and could lead to substantial reductions in tax revenue

Summary

Introduction

The growing importance of intellectual property as a factor in production, and concern that it is easier for firms to shift income from this source than it is from others, presents challenges for tax design. Firms can and do position their intellectual property with a view to reducing tax liabilities. Despite these concerns, firms do not by and large locate the legal ownership of intellectual property in the lowest tax countries, and corporate income taxes still raise considerable amounts of revenue in most developed countries. We use our estimates to simulate responses to recent policy reforms that provide preferential tax treatment to income arising from patents. We find that these reforms are likely to have significant effects on the location of ownership of new intellectual property, and could lead to substantial reductions in tax revenue. Our estimates could be used to simulate a wide range of other counterfactual situations

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