Productive and Unproductive Reactions of MNEs to International Tax Differentials

I provide initial evidence that international taxation impacts the magnitude of R&D investments in the UK. Relying on a simple theoretical model, I show that the observed response is consistent with the mispricing of intra-group transactions. My structural estimates suggest that transfer prices for internally provided innovation increase by around three percent in response to a one percentage point increase in foreign taxation. This response is more pronounced than previous estimates of aggregate profit shifting indicate, supporting concerns on the susceptibility of intangible assets to facilitate profit relocation.