Kenneth J. Klassen

GEOGRAPHIC INCOME SHIFTING BY MULTINATIONAL-CORPORATIONS IN RESPONSE TO TAX RATE CHANGES

We investigate geographic income shifting by 191 U.S. multinational corporations in response to worldwide changes in tax rates during 1984-90. Between 1984 and 1986, the United Kingdom reduced corporate tax rates from a maximum of 45% to 35%, and in 1985 France reduced rates from 50% to 45%. Following these reductions in European rates, the United States reduced top corporate tax rates from 46% to 34% between 1986 and 1988. Canadian rates increased between 1984 and 1986 and then decreased through 1989. Beginning in 1988, numerous countries enacted tax cuts, apparently in response to those that occurred earlier in other countries. As discussed in section 3, differential changes in tax rates provide incentives for geographic income shifting by multinational firms. We identify two subperiods during 1984-90 in which relative tax rate changes

State and provincial corporate tax planning: income shifting and sales apportionment factor management

Abstract We empirically document a strategy through which corporations avoid state income taxes. Examining aggregated American state and Canadian provincial data from 1983–1991, we find corporate income tax revenues are concave in corporate tax rates, consistent with firms shifting their tax bases to more favourably taxed jurisdictions. Additional tests exploit unique features of state formula apportionment systems and find manufacturing shipments from states that tax outside their borders (throwback states) are decreasing in corporate income tax rates on sales.

The Effect of Foreign Reinvestment and Financial Reporting Incentives on Cross-Jurisdictional Income Shifting

This paper investigates the influence of foreign reinvestment-related and financial reporting incentives on income shifting of U.S. multinational companies. While foreign and domestic policymakers are concerned with the effect of income shifting on dwindling tax revenues, to date no research has focused on the character of firms that are more aggressive income shifters. We provide insights on the role of cross-sectional variation in foreign reinvestment-related incentives and financial reporting incentives in income shifting; insights that are useful to policymakers, regulators, researchers and stakeholders. Using a comprehensive approach to estimate income shifting, we find evidence consistent with our argument that foreign reinvestment-related incentives affect a firm’s propensity to shift income when domestic tax rates exceed foreign tax rates, but not when foreign tax rates exceed domestic tax rates. We also find that firms with low foreign tax rates and incentives to manage income on their financial statements more actively shift income out of the U.S. than other firms. Finally, we estimate that firms with high reinvestment-related (financial reporting) incentives shift approximately

Transfer Pricing: Strategies, Practices, and Tax Minimization

42 million (

Assessing the Market Reaction to Unfavorable Tax Settlements: Using Textual Analysis to Categorize Ambiguous Tabulated Disclosures

43 million) of additional income per firm per year out of the U.S. relative to firms with low reinvestment-related (financial reporting) incentives.

Prix de transfert: Stratégies, pratiques et réduction maximale de l’impôt

Using a survey of tax executives from multinational corporations, we document that some firms set their transfer pricing strategy to minimize tax payments, but more firms focus on tax compliance. We estimate that a firm focusing on minimizing taxes has a GAAP effective tax rate that is 6.6 percentage points lower and generates about

Valuation of Income Trusts: An Exploration of Clienteles and Implicit Taxes

43 million more in tax savings, on average, than a firm focusing on tax compliance. Available Compustat data on sample firms confirm our survey-based inferences. We also find that transfer pricing-related tax savings are greater when higher foreign income, tax haven use, and R&D activities are combined with a tax minimization strategy. Finally, compliance-focused firms report lower FIN 48 tax reserves than tax-minimizing firms, consistent with the former group using less uncertain transfer pricing arrangements. Collectively, our study provides direct evidence that multinational firms have differing internal priorities for transfer pricing, and that these differences are strongly related to the taxes reported by these firms.

How Does Transfer Pricing Risk Affect Premia in Cross-Border Mergers and Acquisitions?

We examine the financial statement disclosures that accompany settlements of uncertain tax benefits (UTB). We use textual analysis to develop a measure of the similarity between tax footnotes and a tax settlement-specific list of terms intended to capture unfavorable outcomes. This proxy represents settlements involving additional, unanticipated payments or tax expense in excess of the UTB accrual. After demonstrating that this proxy is associated with a subset of manually verified unfavorable settlements, we examine whether the market reacts to disclosure of these negative events. Evidence from short-window abnormal returns analyses supports that stockholders negatively value the unfavorable settlements, as captured by our proxy. Our research adds to the emerging literature that examines the tax outcomes within firms by developing a measure that captures disclosure of plans that fail to be upheld by tax authorities. Our research also provides a method to classify routine but ambiguous financial statement disclosures, and demonstrates specifically the value relevance of certain UTB information.

Supporting Tax Policy Change Through Accounting Discretion: Evidence from the 2012 Elections

Using a survey of tax executives from multinational corporations, we document that some firms set their transfer pricing strategy to minimize tax payments, but more firms focus on tax compliance. We estimate that a firm focusing on minimizing taxes has a GAAP effective tax rate that is 6.6 percentage points lower and generates about

Shareholder Activism and Voluntary Disclosure Initiation: The Case of Political Spending

43 million more in tax savings, on average, than a firm focusing on tax compliance. Available Compustat data on sample firms confirm our survey-based inferences. We also find that transfer pricing-related tax savings are greater when higher foreign income, tax haven use, and R&D activities are combined with a tax minimization strategy. Finally, compliance-focused firms report lower FIN 48 tax reserves than tax-minimizing firms, consistent with the former group using less uncertain transfer pricing arrangements. Collectively, our study provides direct evidence that multinational firms have differing internal priorities for transfer pricing, and that these differences are strongly related to the taxes reported by these firms.