Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)
Taxing Royalty Payments
(), Dirk Schindler
() and Guttorm Schjelderup
Abstract: The digital economy is characterized by the use of
intellectual property such as software, patents and trademarks. The pricing
of such intangibles is widely used to shift profits to low-tax countries.
We analyze the role of a source tax on royalty payments for abusive
transfer pricing, and optimal tax policy. First, we show that mispricing of
royalty payments does not affect investment behavior by multinationals.
Second, it is in the vast majority of cases not optimal for a government to
set the source tax equal to the corporate tax rate. The reason is that
shutting down abusive transfer pricing activities needs to be traded off
against mitigating the corporate tax distortion in capital investment. The
latter can be achieved by some tax deductibility of royalty payments. If
the true arm's length transfer price equals zero or for special corporate
tax systems that treat debt and equity alike (i.e., for ACE and CBIT), it
will be optimal to equate both tax rates.
Keywords: Royalty taxation; intellectual property; multinationals; profit shifting; (follow links to similar papers)
JEL-Codes: F23; H21; H25; (follow links to similar papers)
22 pages, September 16, 2016
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