Corporate patents, R&D success, and tax avoidance

It is well known that research and development (R&D) tax policies are written to encourage firm innovation, a crucial driver of business growth. However, evidence on the effectiveness of tax benefits for innovation is largely anecdotal and empirical examination of the influence of innovation on firm-level taxation is still underexplored. In this study we use an archival research design to assess the implications of corporate innovation on tax avoidance. Based on a large sample of patent data from 1987 to 2010, we find that, on average, both a firm’s innovation productivity (using patent counts) and innovation quality (using patent citations) are positively associated with its tax avoidance level. Nevertheless, we find that the success of R&D investment, in terms of patent output per R&D dollar, is not associated with tax avoidance. Our study is informative for the debate about tax credit reform, such as establishing a ‘patent box’ regime for the purpose of spurring both the conduct of research and commercialization of R&D program.