Are U.S. Multinational Corporations Becoming More Aggressive Income Shifters?

Abstract

This paper examines income shifting of U.S. multinational companies over the past two decades. Domestic and foreign policy makers are increasingly concerned with the effect of income shifting on dwindling tax revenues, however, extant research on income shifting by U.S. multinational enterprises is mixed. We address the disconnect between the academic literature and the policy maker's perceptions by examining the extent of multijurisdictional income shifting by U.S. multinational companies. We directly address conflicting results in extant literature and show that using either multiperiod proxies or instrumental variables overcomes weaknesses of annual proxies in this setting. Our tests show that U.S. companies have become more active at shifting income out of the United States as the regulatory costs of shifting have changed. Holding tax rate differences between U.S. and foreign jurisdictions constant, our empirical estimates suggest that our sample of 380 corporations with low average foreign tax rates collectively shifts approximately $10 billion of additional income out of the United States annually during 2005-2009 relative to 1998-2002 due to varying regulatory costs of shifting.

On the Interdependency of Profit Shifting Channels and the Effectiveness of Anti-Avoidance Legislation

“…Nonetheless, recent studies by Hopland et al (2017), de Simone (2016, and Kim et al (2015) show that specific research designs, reform settings and 1 For the effect of anti-avoidance legislation on the debt channel see, for example, Buettner et al, 2012, Blouin et al, 2014. For the effectiveness of transfer pricing regulations see, for example, Klassen and Laplante, 2012, Blouin et al, 2010, Lohse and Riedel, 2013, Beer and Loeprick, 2015, Saunders-Scott, 2015 estimation techniques make it possible to draw inferences on the formation of profit strategies even from archival data.…”

Tax Rate Biases in Tax Planning Decisions: Experimental Evidence

“…Widely adopted tax-planning strategies exploit discretion in setting intra-group transfer prices -5 -for intermediate inputs (Beer andLoeprick 2015, Klassen andLaPlante 2012), special-tax regimes Thornock 2013, Dyreng andLindsey 2009), and financial instruments such as hybrids (Johannesen 2014), derivatives (Donohoe 2015), and insurance contracts (Brown 2011). In addition, income shifting through intra-group debt financing is widespread as internal capital markets enable firms to exploit tax-rate differentials (Desai, Foley, and Hines 2004) and to shift income via interest payments to low-tax jurisdictions (Buettner and Wamser 2013).…”

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