Article de revue

Tax Competition, Tax Incentives, and IP Regimes

Lyne Latulippe et Julie S. Gosselin

Publié dans la Revue 2023 Conference Report, Canadian Tax Foundation, 12:1 (2023)

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Abstract

Certain features of tax systems, such as incentives targeting income from intellectual property (IP), may play a role in enabling profit transfer and can exert additional pressures on the tax policies of other nations. Notably, in 2015, the Organisation for Economic Co-operation and Development (OECD) identified patent box regimes as a form of harmful tax competition and recommended modifying these regimes to incorporate a substantial activity requirement. Following this guidance, compliant regimes proliferated in many countries. The first section of this paper delves into the concept of tax competition, contending that the pursuit of competitiveness should not overshadow the fundamental goals and principles inherent in sound tax policy. The remainder of the paper focuses on a specific form of tax competition that aims to attract IP and the revenues it generates. The second section analyzes an indicator of profit shifting through intangibles developed by the OECD—specifically the royalty-to-research and development (R & D) ratio—and draw comparisons between Canada and other countries. Our results reveal a persistent and significant gap between a small group of countries with a high royalty-to-R & D ratio and other countries for the period 2005-2020, and a significant increase in the percentage of royalties received by the high-ratio group. In this sense, they show a tenacious effect of old forms of IP regime contributing to tax competition. In the third section, we explore the relationship between IP regimes (both before and after the OECD’s base erosion and profit shifting project) and the royalty-to-R & D ratio. We offer preliminary insights into the potential association of new IP regimes with royalty receipts and R & D expenses, suggesting that the advantages derived from implementing an IP regime may be less pronounced for late adopters than they were for early adopters.

 

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