Multinationals’ IP tax break like 7-month tax break for workers

Countries are giving multinational corporations an average 63% tax discount on profits generated from intellectual property.¹ The size of the discount is proportionally the same as allowing workers to not pay income tax for seven months of the year.

Countries offering the tax discount are giving away at least US$29 billion of their own tax revenue each year.² At the same time, they globally cost other countries US$84 billion in tax losses a year, as multinationals respond to the tax discount with abusive profit shifting out of countries where they have their real operations.³

Alex Cobham, chief executive at the Tax Justice Network said:

“Imagine telling the government it can’t tax your wages because you once studied abroad, or better yet, because you’ve stored your diploma in a drawer in another country. Now imagine the government accepting this and letting you not pay tax for seven months of the year. December would be very different for you and your family if you got to stop paying tax on your wages back in May.

“This isn’t too far off from how multinational corporations exploit the ‘pay-where-you-say’ approach that countries have been using to tax multinationals for over 100 years. We need to replace this with a ‘pay-where-you-play’ approach that taxes multinationals where they employ workers and sell goods and services. Countries at the UN have committed to doing just this with a new UN tax convention.”

The large tax discounts are a result of special tax rules known as “patent box” rules.

Alex Cobham said:

“What these special tax rules do is allow multinational corporations to say that their profits weren’t made by workers selling and customers buying goods and services, but by assets they own. That means the profits must be taxed where the assets have been located, which just happens to be in corporate tax havens.”

The justification for the special deal is that the tax giveaways are supposed to incentivise multinational corporations to encourage innovation locally, such as developing new vaccines in local labs. But multinational corporations typically move their patents out of the places where they develop them and into corporate tax havens to underpay tax.

An example is pharma company GSK, which registered drugs it developed, manufactures and markets largely outside the UK under the UK’s patent box rules. Investigators at TaxWatch found that in 2024 alone, GSK gained a £486 million tax discount in the UK from patent box rules meant to incentivise innovation in the UK applied to drug patents that at least some of which GSK had developed outside the country.⁴ This tax discount was larger than the entire annual budget that year of the Biotechnology & Biological Sciences Research Council, the UK government’s main funding arm for bio-science innovation .

The tax discount doesn’t just cause the UK to give up huge sums of tax revenue, but also forces the countries where those drugs are being manufactured to forgo the revenues.

Alex Cobham said:

“If you’re buying someone a smartwatch this Christmas, you’ll pay with your taxed income and pay VAT. But the multinational profiting from your purchase likely won’t get taxed properly, if at all, because governments must abide by the make-believe that the profit arises in the tax haven where the smartwatch’s patent is registered, not in the country where you bought the smartwatch nor in the country where it was built or designed.”

The Tax Justice Network’s findings come as countries at the UN negotiate an end to this costly, globally-enforced make-believe.

Exploiting patent box rules is just one instance of how multinational corporations exploit the 100-year-old “pay-where-you-say” approach at the heart of the global tax system, which the Tax Justice Network argues must be replaced with a “pay-where-you-play” approach.⁵

The “pay-where-you-say” approach – adopted by the League of Nations in the 1920s and dating back to a time when most households didn’t have electricity and most countries were colonies – taxes multinationals corporations based on where they declare their profits. Modern multinational corporations, which are very different to international corporations from the 1920s, exploit this approach by moving their profit out of the countries where they make it and into corporate tax havens before they declare it, resulting in countries losing US$348 billion in corporate tax a year⁶. Exploiting patent box rules is one of the many levers multinationals use to move their profit out of countries.

In contrast, the “pay-where-you-play” approach taxes multinational corporations based on where they do business. That is, where they employ workers and make and sells goods and services to make their profit – regardless of where they declare the profit in the end.

Countries at the UN have already committed to replacing the “pay-where-you-say” approach with a new approach based on a “fair allocation of taxing rights” as part of the new UN tax convention being negotiated. In last month’s negotiations, countries focused on what alternative approaches might look. Most countries backed the latest draft text of the convention, which sets out a “pay-where-you-play” approach.⁷

The Tax Justice Network finds that 42 countries have patent box rules, or are fully exempting multinational corporations from paying tax, out of the sample of 70 countries monitored on the Tax Justice Network’s Corporate Tax Haven Index – which is a ranking of countries most complicit in helping multinational corporations underpay tax.⁸ The findings are part of the latest rolling update to the index, which saw little change in countries’ regulations and standings since 2024.⁹ The top 10 ranking jurisdictions today are: British Virgin Islands (1st), Cayman Islands (2nd), Switzerland (3rd), Bermuda (4th), Singapore (5th), Hong Kong (6th), Netherlands (7th), Jersey (8th), Ireland (9th) and Luxembourg (10th).

If countries were to eliminate their patent box rules, they would on average drop 1 place on the ranking as a result of the single regulatory change, and reduce their contribution to global corporate tax abuse by 12%.

They would also recover the billions in tax that are given up every year under patent box rules. Those with the most to gain are the US, the UK and the Netherlands. The US would drop 2 places and gain US$15.9 billion in tax; the UK would drop 1 place and gain £2.3 billion; the Netherlands would drop 1 place and gain €2.4 billion.¹⁰

Tax experts and campaigners like the Tax Justice Network argue that tax incentives better support innovation and cut out tax abuse when they are applied to costs, rather than to profits the way patent boxes are. Subsidising the costs of research and development more effectively reduces barriers to innovation than the promise of a bigger payout. This directly boosts job creation and local economic activity. When tax incentives are applied to just costs, they provide a benefit only when and where a cost is incurred, leaving no benefit to be gained by shifting profit into tax havens.

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Notes to editor

1. 42 countries were found to have patent box rules, or to be fully exempting multinational corporations from paying tax, out of the sample of 70 countries monitored on the Tax Justice Network’s Corporate Tax Haven Index, who together host 87% of global foreign direct investments. Their patent box rules on average permit multinational corporations to pay a tax rate on profit designated as derived from intellectual property that is 63% lower than the statutory corporate tax rate. Please note that an advanced version of the press release shared with some ahead of the launch of the Corporate Tax Haven Index erroneously said 40 countries were found, leaving out 2 countries out of the assessment. This error has been corrected. The addition of the two countries into the assessment has not resulted in noticeable changes to the key figures presented in the advanced version of the press release.
2. Only 13 countries report statistics on the tax revenues they forgo to patent box rules. In order of the biggest to smaller losers, these are the US ($16bn), the UK (£2.3bn), the Netherlands (€2.4bn), France (€1.2bn), Belgium (€638mn), Cyprus (€205mn), Spain (€51mn), Hungary (HUF14bn), Lithuania (€24.6), Ireland (€24mn), Portugal (€9mn), Greece (€2mn) and Slovakia (€0.9mn). The statistics can be found on the Global Tax Expenditures Database (GTED). Together these countries forgo $23.8 billion in tax a year. Using available cross-border royalty flows to assess forgone revenues for countries offering patent boxes but not reporting statistics on the tax revenues they forgo, we estimate revenue forgone from Patent Boxes and similar IP exemption regimes to be at US$29 billion, across the 32 countries covered in the Corporate Tax Haven Index. We use the World Trade Organisation (WTO) Balanced Trade in Services (BaTiS) dataset (updated February 2025) to extrapolate revenue forgone from lower or no-CIT IP regimes. Starting from the amount of “Charges for the use of intellectual property n.i.e” received by each country, we then calculate the hypothetical tax revenue if such income was taxed at the statutory rate, as well as the (lower) tax revenue resulting from the application of preferential tax regimes applicable to IP income. The difference between both amounts of tax revenue is an approximation of revenue forgone. Extrapolation was not possible for one jurisdiction, Andorra, due to the absence of data in the BaTiS dataset.
3. See this excel sheet for more information.
4. See TaxWatch’s October 2025 report, The great pharma tax giveaway.
5. Arguably, the most consequential feature of the current global tax system was established in the 1920’s by the League of Nations. This is the “arm’s-length-principle” which has served as the basis on which multinational corporations are taxed for a century. The principle treats the individual parts of a multinational corporation – its subsidiaries, headquarter, holding companies, etc – as separate businesses and taxes them separately. Each country taxes the parts located within its borders. This is the key principle that multinational corporations exploit when they shift profits out of one part of the corporation in one country and to another part in a corporate tax haven in order to underpay tax. We refer to this approach to tax as “pay-where-you-say” because it taxes multinational corporations based on where they declare their profits on paper – which can often be in a corporate tax haven where the only presence the corporation has is a mailbox it rents. The alternative to this approach is unitary taxation with formulary apportionment. This approach treats all the parts of multinational corporation as one entity, and requires the corporation to be taxed on the profit it makes as whole. Each country in which the multinational corporation operates – where it employs workers, makes goods and services and sells them – taxes a slice of the profits. The size of this slice is proportional to the slice of the multinational corporation’s operation that takes place within the country’s borders. So if a quarter of a multinational corporation’s workforce and sales are in Kenya, then a quarter of all the profit it declares, wherever it declares it, must be taxed by Kenya. Kenya taxes this profit in accordance with its corporate tax rate. We refer to this approach as “pay-where-you-play”. By requiring a multinational corporation’s profits to be proportionally taxed across the countries where it genuinely does real business, where each country can tax its allotted share of profit as it sees fit, unitary tax makes corporate tax havens redundant. A corporate tax haven may still choose to have a corporate tax rate of 0%, but if a multinational corporation doesn’t do real business in the tax haven and only rents a mailbox there, the share of the multinational’s profit that the tax haven can tax will be very small to non-existent. The OECD’s failed two-pillar proposals sought to narrowly implement unitary tax on a very few multinational corporations, but with deeply biased rules for how proportionality would be allotted that benefitted the richest countries and European tax havens. The UN has committed to a “fair allocation of taxing rights” in the Terms of Reference of the UN Framework Convention on International Tax Cooperation, which is broadly understood to be best achieved by replacing the arms-length principle (pay where you say) with unitary tax (pay where you play).
6. See the State of Tax Justice 2024 for more information on countries’ tax losses to global tax abuse.
7. Most countries — particularly from the global south — backed the latest text of Article 4, which holds that a state should have the right to tax a multinational’s profits when the multinational has meaningful economic activity in that jurisdiction. Article 4 would, in effect, flip the basis of the international tax system to a “pay-where-you-play” approach. More information about the UN tax convention negotiations, including a summary of what countries said in negotiations specifically on the commitment to a fair allocation of taxing rights, is available here.
8. The Corporate Tax Haven Index ranks countries on how complicit they are in helping multinational corporations underpay corporate income tax in other countries. It does this by evaluating how much wiggle room for corporate tax abuse a country’s laws and regulations provide, and by monitoring how much financial activity conducted by multinational corporations enters and exits the country. This two-factor approach of assessing both laws and activity allows the index to rank countries on the relative risks their laws pose to others in practice and not just in theory, unlike most tax haven “blacklists”.
9. The Corporate Tax Haven Index is updated on a rolling basis in batches. Each batch include updates to a set of indicators, with the latest batch – published today – updating the index’s indicators on Capital Gains Taxation​, Loss utilisation, Fictional interest deduction and Patent boxes. This latest update sees minimal changes in countries regulations on these specific indicators, and few movements on the ranking. The update includes the latest figures on how much financial activity conducted by multinational corporations enters and exist each country on the index. These figures on their own are a neutral factor. Having more or less financial activity entering or exiting is neither good nor bad, but the greater the activity the greater the responsibility a country has to ensure its regulations do not enable cross-border tax abuse. Due to the minimal regulatory change, the few ranking movements on the ranking are mostly driven by changes in financial activity.
10. See note 2.
11. On 25 November, the OECD released its annual update of its Corporate Tax Statistics, which included a section on tax incentives for research and development. The launch was accompanied by a blog post discussing “income-based R&D tax incentives”, that is, profit-based incentives for R&D, which largely overlaps with our update today to the patent box regimes indicator on the Corporate Tax Haven Index. The OECD also made available their database of the reduced rates offered under these regimes.Comparing the Tax Justice Network’s evaluations of jurisdictions patent box rules against the OECD’s evaluations of the same jurisdictions, we find that the OECD fails to identify almost a third (29%) of jurisdictions that the Tax Justice Network found to be offering tax incentives that enable patents and intellectual property to be used to shift profit. Apart from technical differences in effective tax rate calculations (which concerns mainly Switzerland, Greece and Portugal), this shortcoming is largely due to the OECD’s disregard of concurrent harmful tax rules that compound or replicate the harmful impacts of patent box rules. The jurisdictions missed by the OECD evaluation fall into two categories.First are jurisdictions that have zero or no corporate income tax rates namely, Anguilla, Turks and Caicos Islands, Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man and Jersey. These jurisdictions are just as readily used for registering patents and consequently shifting profit and abusing corporate tax in other jurisdictions. The OECD exempts these jurisdictions from its evaluation of places offering profit-based tax incentives for patents and intellectual property, since they have no tax rate to begin with to offer exemptions on. In contrast, the Tax Justice Network does identify these jurisdictions, which highlights the difference of outlook between the two organisation’s research approaches. While on paper, these jurisdictions’ tax rules do not provide harmful incentives on patents, in practice their tax rules deliberately encourage the use of patents and intellectual property, among other things, to shift profit out of other jurisdictions.

    Second are jurisdictions that allow a 0% or near-0% corporate income tax rate under specific circumstances, which when used in conjunction with patents or intellectual property, enable patents to be used to shift profit and abuse corporate tax. The OECD’s evaluations disregard the presence of these rules in its identification of jurisdictions that provide profit-based incentives on patents. For instance, 6 jurisdictions fully exempting foreign IP income are disregarded from the OECD assessment of IP tax regimes (Aruba, Costa Risa, Hong Kong, Liberia, Singapore, Seychelles), insofar as the 0% tax rate effectively applicable to foreign IP income is not considered by the OECD. The same happens with tax systems that de facto allow for full or nearly full exemption from CIT under specific (yet broadly applicable) circumstances. Indeed, the OECD disregards 0% or near 0% tax rates available for IP income accrued by resident companies for at least 5 countries (Cyprus, Estonia, Latvia, Romania, United Arab Emirates).

    Both the first and second category, into which most unidentified jurisdictions fall, are cases where a jurisdiction’s tax rules are designed in a way that enables profit-based incentives on patents without having a specific tax rule on patents. While these can be said to be a difference in perspective between the OECD and Tax Justice Network, to countries working to tackle cross-border corporate tax abuse costing them billions every year, the OECD’s approach leaves a significant blind spot.