What's inside the Box? Fundamentals on Transfer Pricing to understand IP Regimes¿

My thesis is introduced in the context of transactions between companies belonging to the same group. In a context like the current one increasingly dominated by virtually and less tied to territoriality, the companies need to take into account a variety of factors. One of this, is linked to tax planning, which is connected with the choice to move to more "convenience" fiscal systems. We consume more and more products or services that have a piece of history of each continent, where a company can operate. Lately is increasing the importance of not tangible assets, such as software, involving many hours of research and development. Intangible assets constitute a major value-driver for multinational companies. The related intellectual property (IP) most notably patents, trademarks and copyrights usually does not have a fixed geographical nexus and can be relocated without significant (non-tax) costs. Multinational companies can use this flexibility to reduce their overall tax burden by allocating valuable IP to group companies resident in low-tax countries. Indeed, recent empirical evidence shows that patent applications are responsive to corporate income tax and that European companies' intangibles are more likely to be held by low-tax subsidiaries. Tax planning involving intangible assets has become increasingly popular and recently received widespread attention as, it has been associated with strikingly low effective tax rates on foreign profits of high-tech multinational such as Google and Apple. This has triggered a debate on profit shifting by multinational companies through relocating valuable intangibles to low-tax countries. As opposed to tax evasion, tax planning is legal and also widely perceived as legitimate because it first and foremost exploits international tax rate differentials and lack of harmonization in the field of direct taxes. However, it is not desirable if it results in income not being taxed at all, so called non-taxation, as this creates a competitive disadvantage for companies which may not make use of sophisticate tax planning models, whether due to their size, their geographic focus of or their business model. The OECD has acknowledged the issues associated with base erosion and profit shifting (BEPS) and has initiated an action plan to fight back BEPS. This action plan comprises actions which touch upon diverse fields in international taxation and are currently elaborated in detail. Tax legislators in particular increasingly struggle to tax income from intangible assets in a way that prevents IP income from being shifted abroad. Moreover, policy makers are concerned that research and development (R&D) as well as innovative activities, which are associated with positive spillovers, are relocated to other countries for tax reasons. One policy response to profit shifting and tax base erosion involving intangible assets is to tighten transfer pricing rules and introduce targeted anti-avoidance provisions. The focus of this work is to describe the attractive tax environment, that has been developed in order to retain or attract IP income. In this regard the most significant policy development in recent years has been the increasing popularity of Intellectual Property Box regimes. They offer a substantially reduced corporate income tax rate for income derived from patens and often other kinds of intangible assets. France (in 2000) and Hungary in (2003) were the first countries to adopt such policies. However