Corporate taxation and the choice of patent location within multinational firms


Corporate patents are important assets in the modern economy, where knowledge is highly valued. In many multinational enterprises (MNEs), they constitute a major portion of the business's value. The intra-firm transfer pricing process for patent-related royalty payments is moreover often highly intransparent and patents thus represent a major source of profit shifting opportunities between multinational entities. For both reasons, MNEs have an incentive to locate their patents at low-tax affiliates to minimize the corporate tax burden. The purpose of our paper is to empirically test for this relationship by exploiting a unique dataset that links information on patent applications to micro panel data for European MNEs. Our results suggest that the corporate tax rate (differential to other group members) exerts a negative effect on the number of patent applications filed by a multinational affiliate. The effect is quantitatively large and robust to controlling for firm size and unobserved heterogeneity between the entities. The findings moreover prevail if we account for royalty withholding taxes and binding ‘Controlled Foreign Company’ rules.

Research Highlight 2009

Does corporate taxation affect patent location?

There is concern amongst policy makers that companies have some discretion over the location of their intellectual property, independently of where the IP was generated, and therefore may benefit from low tax rate jurisdictions. This research project investigates the extent to which corporate taxation affects the location of the ownership of patents within a multinational group. The research exploits a unique dataset which links patent data from the European Patent Office to accounting data for European companies between 1995 and 2003. The results suggest that the host country’s corporate tax rate exerts a large negative effect on the number of patents filed by the subsidiary of a multinational company. In addition, binding ‘Controlled Foreign Company’ rules tend to reduce the number of patent applications.

Nadine Riedel


Tom Karkinsky and Nadine Riedel