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Income shifting from high-tax to low-tax jurisdictions is considered a primary method of reducing worldwide tax burdens of multinational firms. Current losses also affect income shifting incentives. We extend prior approaches by explicitly considering unprofitable affiliates and test whether the association between losses and tax incentives for unprofitable affiliates deviates from the negative association observed in profitable affiliates. Results suggest that multinational firms alter the distribution of reported profits to take advantage of losses. Our point estimate for profitable affiliates implies that an increase of one standard deviation in the tax incentive, C, of an affiliate with an average return on assets of 13.3 is associated with a lower return on assets of 0.5 percentage points. The same change in tax incentive of an unprofitable affiliate is associated with an increase in its return on assets of approximately 0.7 percentage points, holding assets, labor, productivity, and other factors constant. We further document a larger responsiveness to tax incentives between profitable and unprofitable affiliates in high-tax jurisdictions, consistent with predictions.

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We examine how U.S. individuals respond to regulation intended to reduce offshore tax evasion. The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report information to the U.S. government regarding U.S. account holders. We first document an average $7.8 billion to $15.3 billion decrease in equity foreign portfolio investment to the United States from tax-haven countries after FATCA implementation, consistent with a decrease in "round-tripping" investments attributable to U.S. investors' offshore tax evasion. When testing total worldwide investment out of financial accounts in tax havens post-FATCA, we find an average decline of $56.6 billion to $78.0 billion. We next provide evidence of other important consequences of this regulation, including increased expatriations of two anonymous investors for providing institutional insight. We also appreciate helpful comments from two anonymous referees, Neviana Petkova (discussant), Sonja Rego (discussant),

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Research on the determinants of tax avoidance have relied on tests using GAAP and cash effective tax rates (ETRs) and total and permanent book‐tax differences. Two new proxies have emerged that overcome documented limitations of these proxies: one, developed by Henry and Sansing (2018), allows for more meaningful interpretation of results estimated in samples that include loss observations. The other, reserves for unrecognized tax benefits (UTB), provides new data on tax uncertainty. We offer empirical evidence on how well tests using these new proxies perform relative to those extensively used in prior research. The paper finds that tests using the proxy developed by Henry and Sansing (2018) have lower power relative to those using other proxies across all samples, including a sample that includes loss observations. In contrast, when firms accrue reserves for uncertain tax avoidance, tests using the current‐year addition to the UTB have the highest power across all proxies, samples, and levels of reserves. In the absence of reserves, tests using the GAAP ETR best detect uncertain tax avoidance, on average. This study contributes to the literature by using a controlled environment to provide the first large‐scale empirical evidence on how the power of tests varies with the use of relatively new proxies, the inclusion of loss observations, and the advent of FIN 48.

This study investigates the circumstances under which “enhanced relationship” tax-compliance programs are mutually beneficial to taxpayers and tax authorities, as well as how these benefits are shared. We develop a model of taxpayer and tax authority behavior inside and outside of an enhanced relationship program. Our model suggests that, despite the adversarial nature of the relationship, an enhanced relationship program is mutually beneficial in many settings. The benefits are due to lower combined government audit and taxpayer compliance costs. These costs are lower because taxpayers are less likely to claim positions with weak support and the government is less likely to challenge positions with strong support inside the program. Further, we show that an increase in the ability of the tax authority to identify uncertain tax positions makes an enhanced relationship tax-compliance program more attractive to both the taxpayer and the tax authority. JEL Classifications: H26