IP Box Regimes and Multinational Enterprises: Does Nexus Pay Off?

Over the last decades, the OECD and the European Union (EU) aimed at regulations that prevent aggressive intellectual property (IP) tax planning of multinational enterprises (MNEs). These regulations should stop the international race to the bottom of effective tax burdens. Contemporaneously, EU Member States enacted favourable tax systems for corporate research and development (R&D) activities in order to increase their location attractiveness. Especially, the output-oriented R&D tax incentives, namely IP box regimes, gained attention from a tax fraud perspective as well as popularity by national governments to generate public revenues. In this article, we qualitatively and quantitatively examine the European IP boxes. Thereby, we analyse their impact on IP tax planning and location attractiveness in light of the changes introduced by the OECD’s modified nexus approach. Our results demonstrate that even after introducing the nexus, a considerable reduction in effective average tax burdens is possible. Nonetheless, in line with the policy intention, the nexus effectively prevents excessive reductions of MNEs’ tax burden. Moreover, we account for changes in IP tax planning and observe implicit subsidies for the combination of output- and input-oriented tax incentives. Thus, these combinations reduce MNEs’ tax liabilities and finally, increase the location attractiveness in the post-nexus era.