In 2013 the OECD introduced its Action Plan on base erosion and profit shifting (BEPS). One
of the major concerns of this Plan is a strategic use of intangible assets as an instrument for
profit shifting. The main purpose of this paper is to test whether multinational enterprises use
intangibles as an important BEPS channel by empirically analysing the relationship between
taxation and bilateral royalty flows. We employ the OECD data on 3,660 country-pairs for the
time period of 1990-2012 and apply the Poisson pseudo-maximum likelihood estimator in a
fixed-effects framework. The main results point to a negative impact of taxation on bilateral
royalty flows. Moreover, we find that tax differentials, which represent a relative level of
taxation in a recipient state compared to other potential royalty recipients, have a significant
influence on royalty payments as well. For tax policy considerations, the paper provides
various insights to the ongoing work on BEPS by the G20, the OECD, and the European
Commission. For example, we find that such reform suggestions of the OECD Action Plan as
an enforcement of the Nexus Approach, as well as an introduction of strict Controlled Foreign
Company rules and transfer pricing regulations are likely to reduce international royalty
flows.
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