(Un)Intended Effects of Preferential Tax Regimes: The Case of European Patent Boxes

Patent boxes have become an increasingly popular tax instrument in the European Union and the US to attract mobile tax bases of multinational enterprises (MNEs) as well as to foster productivity. This paper estimates the size of the
(un)intended effects of the new preferential tax regime, which grants a reduction in the tax burden on income from intellectual property. We show that MNE affliates that can benefit from the preferential regime report 8.5 percent higher profits. The profit change splits up into a profit shifting and a productivity effect in proportions 2/3 and 1/3. Surprisingly, the profit shifting effect includes an unintended, reversed profit shifting out of the affiliate. Contrary to expectation, the overall tax base adjustment might lower tax revenues collected from MNEs.