The relationship between Tax Payments and MNE’s Patenting Activities and Implications for Real Economic Activity: Evidence from the Netherlands

Abstract

We analyze the role of innovation in explaining tax payments using panel data analyzing patent active firms located in the Netherlands for the period 2000‐2010. In order to separate purely tax motivated patenting activities from patenting activity derived from real economic activity stemming from local R&D efforts, we consider the role of (local) R&D investments. Evidence shows that more R&D efforts (input) and more innovative output (i.e. patents) leads to lower tax payments. This first part of the results can be reconciled with the fact that if the Dutch taxation climate is actually conducive to the knowledge economy as a driver of economic growth in the sense that it stimulates firms to invest in R&D locally, we should not find a significant difference between R&D efforts (input) and innovative output (i.e. patents) in the relationship with taxation. In addition, our results reveal that the negative tax effect from patenting is mainly driven by Dutch firms, while foreign MNEs derive lower taxes from higher investments in R&D, which further supports our claim that firms in the Netherlands separate income from real innovative activity to only a limited extent. To explore this further, we also investigate to what extent innovating firms are engaging in real economic activities by looking at the Dutch patent box regime and the R&D tax credit, for the period 2011‐2015 for which we have available data. Our overall results suggest that the reallocation of income from innovation, which to a certain extent can be driven by beneficial tax schemes, does not seem to interfere with real economic activities.