Stanford Graduate School of Business
Knight Management Center
655 Knight Way
Stanford, CA 94305
We use confidential Internal Revenue Service data on the magnitude of U.S.-foreign intercompany transactions to develop a measure of the likelihood that U.S. multinational entities (MNEs) shift income out of the U.S. Results show that the likelihood of net outbound income shifting is positively related to tax haven subsidiaries, high tech operations, income tax incentives, R&D, and foreign profitability, and negatively related to foreign sales, gross profits, size, and capital expenditures. Supplemental analyses explore cross-sectional differences in IRS audit scrutiny of outbound income shifters and aggressive income shifters. Results suggest outbound and aggressive income shifters are no more likely to be audited than other MNEs and that the rate of audit of both outbound shifters and aggressive shifters has decreased since the financial crisis. Our study provides researchers, investors and tax authorities with a measure of the likelihood that a firm engages in net outbound or potentially aggressive income shifting.
Can common empirical tests reliably identify tax avoidance? This is an important question because our understanding of the determinants of tax avoidance largely depends on results generated using such tests. We seed Compustat data with three tax avoidance strategies and examine how reliably tests of tax avoidance models using effective tax rates and book-tax differences identify this incremental simulated tax avoidance, holding constant known economic determinants of tax avoidance. We find permanent tax avoidance is more easily detected than deferral strategies, and that financial reporting choices can reduce statistical power. We also conclude that, holding constant other research design decisions, power varies by which proxy is the dependent variable and with the magnitude and pervasiveness of tax avoidance in the sample. We further offer evidence on how research design choices such as sample selection and the approach to handling outliers affect power. We contribute to the literature by using a controlled environment to examine the effectiveness of existing empirical tests.
We investigate how R&D contributes to foreign profit margins in U.S. multinational corporations (MNCs) through wage savings and income shifting. Our research question is timely and important given rising foreign R&D investments and recent scrutiny by tax authorities and policy makers of the use of intangibles to avoid corporate income taxes. Using public data, our results suggest that although wage savings increase foreign margins attributable to foreign R&D activities, the shifting of income attributable to domestic R&D activities to lower-tax jurisdictions has a larger magnitude impact on foreign profit margins. Additional tests confirm that income shifting from domestic R&D is concentrated in firms with high-value patents, patents with low risk of expropriation, financially unconstrained firms, and in years following the implementation of the check-the-box regulations. Our evidence sheds light on the importance of R&D locations in corporate intangible income shifting that separates the location of economic activity from the location of reported taxable income.
We study whether innovation box tax incentives, which reduce tax rates on innovation-related income, are associated with tax-motivated income shifting, investment, and employment in the countries that implement these regimes. Using a sample of European and U.S. multinationals’ subsidiaries operating in Europe and three income shifting models, we find some evidence that firms shift less income out of relatively high statutory tax rate countries following the implementation of an innovation box. We also find that innovation box regimes successfully increase employment but do not result in significant increases in fixed asset investment. Our study contributes to the literature by evaluating multiple income shifting models and informing the ongoing policy debate regarding the economic effects of innovation box regimes.
This study investigates the use of a cost sharing arrangement (CSA) by multinational corporations (MNCs) to shift the income attributable to valuable intellectual property (IP) to low-tax foreign jurisdictions. Using a strategic tax compliance model, we identify three major effects that determine whether an MNC will use a CSA to develop the IP rather than develop the IP domestically: a marketing intangible effect, an undervaluation effect, and an enforcement effect. First, we find that the MNC is more likely to use a CSA to develop the IP when the MNC has valuable domestic marketing intangibles, such as a global brand. Second, the MNC is more likely to use a CSA if the nature of the IP development project allows the MNC to understate the fair market value of the IP. Third, the MNC is less likely to use a CSA if the tax authority can cost-effectively challenge the position and impose retroactive revaluations of the IP.