The Effect of Intellectual Property Boxes on Innovative Activity & Tax Benefits

We exploit a quasi-experimental setting with high internal validity to measure the effect of adopting an intellectual property (IP) box on innovative activity and tax benefits. We document innovative activity increases, including patent applications, grants, and highly skilled employment, at the expense of patent quality. Domestic firms drive this effect. We also provide evidence that firms with patents, on average, enjoy up to 7.0 percent lower effective tax rates, with the most significant tax benefits accruing to multinational firms compared to domestic firms. We use the Belgium IP box that limits tax benefits to patent income. Prior IP box literature analyzes heterogeneous IP boxes and provides evidence of substantial increases in patent applications in response to IP box adoption. Our results suggest the patent-income only IP box leads to a modest increase in innovative activity by a maximum of 5.1 percent, with multinationals benefitting relatively more from a financial perspective.