The Effect of Innovation Box regimes on Income Shifting and Real Activity

The Effect of Innovation Box regimes on Income Shifting and Real Activity

By Shannon Chen, Lisa De Simone, Michelle Hanlon, Rebecca Lester
July 10,2017Working Paper No. 3453

We study whether innovation box tax incentives, which reduce tax rates on innovation-related income, are associated with tax-motivated income shifting and local investment in the countries that implement these regimes. Using a matched sample of European multinationals’ subsidiaries operating in Europe, we find evidence consistent with firms engaging in less tax-motivated income shifting out of the country following the implementation of innovation boxes that provide the greatest tax benefits. We also find that innovation box regimes are associated with higher levels of fixed asset investment. Our study contributes to the patent box literature by evaluating outcomes that the literature has not previously examined and by informing the ongoing policy debate regarding the economic effects of innovation box regimes.