Boosting R&D through Patent Boxes. Panacea or Not?

On October 5th, the OECD presented the final package of the OECD/G20 Base Erosion and Profit Shifting (BEPS) initiative – a cornerstone in the international drive towards corporate tax reform.[1] The coalition for comprehensive changes in this field is broad. Several international organizations and national governments have been pushing toward this direction. Their twofold message is clear: the international tax system must be fairer and more efficient. The debate is not about the end, but about the means.

In this context, a key discussion concerns innovation. The social return on research and development (R&D) investment is often higher than the private return to the companies funding R&D. Policy intervention to close the gap between actual and desired R&D levels may thus be warranted. Tax incentives have become a popular instrument to target this objective. The growing use of patent boxes (PBs) is a case in point.

Patent Boxes are tax expenditures granting a preferential treatment to corporate income earned through intellectual property (IP). Their stated objective is to boost innovation through R&D.[2] The first PB scheme was introduced by France in 1971. More recently, several other countries such as Belgium, China, France, Italy, Netherlands, Spain, and the UK have also put a certain type of PB in place. In others, such as Ireland (where an earlier PB scheme was abolished in 2010), Switzerland and the US, PBs are currently under discussion.

PB regimes vary in the tax rate reductions they offer as well as in their scope and eligibility criteria. In Europe, the reduced tax rates of PBs (i.e., the tax rate on corporate income for which PB benefits are granted) range from 0% in Malta to 15.5% in France. In terms of scope, some countries include existing IP and capital gains as part of the eligible tax base (e.g., France and the UK). Similarly, some countries such as Belgium, Netherlands and Spain apply development conditions (i.e., conditions aimed at linking the benefits of PBs to real research activity in the country where the scheme is implemented) while others such as France and Luxembourg do not.

PB proponents present these schemes as a win-win game. PBs – they argue – boost innovation in the country where they are implemented and, at the same time, are in line with the requirements of a fair international tax system as outlined in the BEPS package.

I disagree.

PBs are likely to be inefficient, if not altogether ineffective in boosting innovation. Three considerations stand out in this regard.

First, by definition, PBs grant tax benefits based on a patent and, thus, an intangible good that is already protected (CPB, 2014).[3] This reduces the elasticity of R&D with respect to the tax benefit granted through PBs. As a result, governments need to apply very low effective tax rates in order to increase the registration of patents and, hence, face significant revenue losses. Griffith et al. (2014) report that “although the countries that introduce patent boxes attract more new patents, the increased share is not sufficient to outweigh the effect of the lower tax rate. With all four patent box policies in place, revenues are less than half of their previous levels in these countries.”[4]

Second, PBs may attract patents but their impact on R&D is less clear. Alstadsaeter et al. (2015) use firm-level data for three sectors – pharmaceuticals, cars and information and communication technology (ICT) – to estimate the impact of PBs on the patent filing strategies of firms. Their results indicate that PBs have a considerable impact on attracting patents. At the same time, however, the authors conclude that PBs do not change real activity in the country because multinational enterprises (MNEs) seem to shift the location of their patents without shifting their research operations.[5]

The nexus approach and its updated version, the so-called modified nexus approach described in Action 5 of the BEPS package are designed to counter this strategy by introducing eligibility conditions to ensure a clearer link between the income derived from IP and the expenditure incurred to develop this IP (OECD, 2014). However, this approach also presents important caveats. One the one hand R&D is often a considerably complex and long process. Moreover, expenditure on R&D may be used for several projects. Identifying and monitoring the historical total amounts of R&D expenditure that should be allocated to a given patent will be a difficult requirement to monitor. On the other hand, the nexus approach would not deter firms from merely shifting their R&D investments from one jurisdiction to another rather than creating additional R&D in the country granting the tax benefit. As a result, the country implementing the PB would see domestic R&D spending go up, but the overall global investment on R&D and, thus, innovation may remain unchanged. Moreover, in the European Union a PB that requires that innovative activity underlying the IP is carried out domestically would go against state-aid rules and, therefore, against the freedom of location inside the internal market (Sanz-Gómez, Rafael, 2015).[6]

Third, PBs discriminate against both un-patentable and unsuccessful research efforts, no matter the potential positive externalities that they could generate. By definition, businesses are eligible for the tax benefit if a patent is registered. Hence, R&D projects that do not result in a patent registration either because they are unsuccessful (Griffith and Miller, 2010) or simply because the research project is run in sectors that are non-patent active (Alstadsaeter et al., 2015), are discriminated against. Moreover, although young firms as well as small and medium size enterprises (SMEs) are more likely to need support to secure the financing needed for R&D, most of the benefits granted through PBs are captured by large firms, particularly MNEs. Indeed, as stated by Hall et al. (2013), a few MNEs are responsible for most of the patent registrations worldwide.

As for the alignment of PBs with the global agenda for corporate tax reform in general and BEPS in particular, the spirit, if not the letter, of the reform goals point in the opposite direction. BEPS and other initiatives put increased transparency at their core.[7] Complex definitions to carve out income that is based on a patent and thus eligible to profit from a PB moves corporate taxation away from this objective. In fact, some authors have referred to PBs as a “Pandora’s Box of Complexity” and have pointed to the risk of diverting resources from real economic innovation towards interpreting, relabelling and litigation to define qualifying income (Fichtner, Michel, 2015). Similar concerns are applicable to the nexus approach and the deliberations it would take to determine which R&D expenditures in which countries can be related to a specific patent.

PBs are no panacea. They do not offer a win-win solution. They are unlikely to foster innovation. And they reduce transparency and are thus misaligned with the global agenda on corporate tax reform.




Alstadsaeter, Annette, Salvador Barrios, Gaëtan Nicodème, Agnieszka Maria Skonieczna, and Antonio Vezzani (2015) ‘Patent Boxes Design, Patents Location and Local R&D.’ CEPR Discussion Papers 10679, C.E.P.R. Discussion Papers, June

Astarita, Caterina, Lovise Bauger, Serena Fatica, Athena Kalyva, Gilles Mourre, and Florian Wöhlbier (2014) ‘Tax Expenditures in Direct Taxation in EU Member States.’ European Economy – Occasional Papers 207, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Dischinger, Matthias, and Nadine Riedel (2011) ‘Corporate Taxes and the Location of Intangible Assets within Multinational Firms.’ Journal of Public Economics 95(7), 691_707

European Commission (2015) ‘ Public consultation on the Re-launch of the Common Consolidated Corporate Tax Base (CCCTB).’

Evers, Lisa, Helen Miller, and Christoph Spengel (2015) ‘Intellectual Property Box Regimes: Effective Tax Rates and Tax Policy Considerations.’ International Tax and Public Finance 22(3), 502_530

Fichtner, Jason, and Michel Adam (2015) ‘Don’t Put American Innovation in a Patent Box: Tax Policy, Intellectual Property, and the Future of R&D’, Mercatus Center on Policy

Griffith, Rachel, and Hellen Miller (2010) ‘Support for Research and Innovation. In: Chote, R., Emmerson, C., Shaw, J. (Eds.), The IFS Green Budget: February 2010, IFS Commentary 112.’

Griffith, Rachel, Helen Miller, and Martin O’Connell (2014) ‘Ownership of Intellectual Property and Corporate Taxation.’ Journal of Public Economics 112, 12 _ 23

Hall, Bronwyn H., Christian Helmers, Mark Rogers, and Vania Sena (2013) ‘The Importance (or not) of Patents to UK Firms.’ NBER Working Papers 19089, National Bureau of Economic Research, May

Köhler, Christian, Philippe Laredo, and Christian Rammer (2012) ‘The Importance (or not) of Patents to UK Firms.’ Nesta Working Papers 12/01

Sanz-Gómez, Rafael (2015) ‘The OECD’s Nexus Approach to IP Boxes: A European Union Law Perspective.’ International Taxation Research Paper Series


[1] For a complete overview of the BEPS package, please go to

[2] R&D tax incentives are supposed to play a crucial role in boosting innovation. Nevertheless, as described by Köhler et al. (2012), most of the literature focuses on the impact of R&D tax incentives on R&D expenditure (i.e., input additionality), whereas studies on the effects of R&D tax incentives on innovation and economic activity (i.e., output additionality) are considerably scarcer. This important distinction and to what extent increasing R&D spending does indeed lead to more innovation goes beyond the scope of this article which is thus based on the assumption that R&D has a positive impact on innovation and, hence, on economic activity.

[3] See also Astarita et al. (2014).

[4] Griffith et al. (2014), p.20.

[5] See also Dischinger and Riedel (2011), and Evers et al. (2015).

[6] See also Griffith et al. (2014).

[7] The EC, for example, has launched a public consultation on the Re-launch of the Common Consolidated Corporate Tax Base (CCCTB), where the potential benefits of the package are described as follows: “The existence of common rules for computing the tax base would render tax competition more transparent in the EU because this would inevitably focus on the levels of (statutory) tax rates. As a result, there would be less room for tax planning.” European Commission (2015) p.3.