Kevin S. Markle

A Comparison of the Tax-Motivated Income Shifting of Multinationals in Territorial and Worldwide Countries

This paper tests for differences in the tax-motivated income shifting behaviors of multinationals subject to different systems of taxing foreign earnings. I find that multinationals subject to territorial tax regimes shift more income than those subject to worldwide tax regimes, but that the difference in shifting is not statistically different when the worldwide firms can defer repatriation of the shifted income. In additional tests, I find that all firms have cash trapped in foreign countries by withholding taxes on dividends and that worldwide firms (specifically those domiciled in the U.S.) have cash trapped by the residual home country tax due on repatriation of foreign dividends.

The Effect of Financial Constraints on Tax-Motivated Income Shifting by U.S. Multinationals

When a U.S. multinational corporation shifts income from the U.S. to foreign jurisdictions, it incurs costs and reaps benefits. The benefits may be reduced if the shifted income must be returned to the U.S. as a dividend in the short term and face the same U.S. tax it would have if the income had not been shifted. Firms, then, have incentive to defer repatriation of earnings and to fund domestic cash needs with external financing. The cost of external financing, however, is increasing in financial constraints, leading to the prediction that constrained firms will be unable to defer repatriation and, therefore, will reap no benefits from shifting. Consistent with this prediction, we find that financially constrained firms shift less income from the U.S. to foreign countries than their unconstrained peers. We estimate that financially constrained firms shift out 20% less of pre-shifted income than unconstrained firms. Translating this percentage to dollar values, the mean (median) constrained firm shifts

The Impact of Headquarter and Subsidiary Locations on Multinationals’ Effective Tax Rates

16 million (

Repatriation Taxes, Internal Agency Conflicts, and Subsidiary-Level Investment Efficiency

7 million) out of the U.S. each year while the mean (median) unconstrained firm shifts

Implicit Corporate Taxes and Income Shifting

321 million (

Transparency and Tax Evasion: Evidence from the Foreign Account Tax Compliance Act (FATCA)

134 million) out of the U.S. each year. Assuming that the inability to defer repatriation is the primary constraint preventing the U.S. worldwide tax system from being a de facto territorial system, we use our findings to estimate that changing to a pure territorial tax system would increase outbound income shifting by U.S. multinationals by 8%.

CROSS-COUNTRY COMPARISONS OF CORPORATE INCOME TAXES

We examine effective tax rates (ETRs) for 9,022 multinationals from 87 countries from 2006 to 2011. We find that, despite extensive investments in international tax avoidance, multinationals headquartered in Japan, the United States, and some high-tax European countries continue to face substantially higher worldwide taxes than their counterparts in havens and other less heavily taxed locations. Other findings include: (1) effective tax rates remained steady over the investigation period; (2) entering a tax haven country for the first time results in a slight reduction in the firm’s ETR; (3) ETR changes vary depending on whether the subsidiary is a financial conduit or an operating subsidiary. These results should aid ongoing international tax policy debates and expand scholars’ understanding about the taxation of multinationals.

The effect of tax and nontax country characteristics on the global equity supply chains of U.S. multinationals

Using a global sample of multinational corporations (MNCs) and their foreign subsidiaries, we find that repatriation taxes impair subsidiary-level investment efficiency. Consistent with internal agency conflicts between central management of the MNC and the local management of its foreign subsidiary representing the economic channel, we find that this effect is concentrated in subsidiaries whose decision-making process has less involvement by central management, that are subject to weak monitoring, and where the MNC is flexible in deferring repatriations. We confirm our results and establish a likely causal relationship using natural experiments in the UK and Japan, which both eliminated repatriation taxes from their international tax systems in 2009. Our paper provides timely empirical evidence to inform expectations for the effects of a recent change to the U.S. international tax laws, which eliminated repatriation taxes from most of the future foreign earnings of U.S. MNCs.

Do Multinationals or Domestic Firms Face Higher Effective Tax Rates

Implicit tax theory predicts that as capital moves to tax-favored investments, the expected pretax returns on those investments decrease. At the global level, this should create a positive relation between country-level tax rates and firm-level pretax returns. However, theory in income-shifting predicts reported pretax returns are inversely related to tax rates, as firms shift profits into lower-tax countries. We analytically model these two theories and empirically test our predictions in two samples of European firms: single-country firms and affiliates of multinational firms. In the sample of single-country firms, we find robust evidence of country-wide implicit taxes, but that this effect is driven by closed economies (non-EU countries). In the sample of multinational firms, we find that the effects of income shifting overwhelm the effects of implicit taxes. Our results imply that certain measures of income shifting estimated using reported profits can be understated when the effects of implicit taxes are ignored, but these effects are less problematic when the research setting includes mostly open economies. Our granular setting of multiple countries and affiliate level data helps explain prior research that finds decreasing corporate implicit tax effects over time, particularly for multinationals.

The Effect of Financial Constraints on Income Shifting by U.S. Multinationals

We examine how U.S. individuals respond to regulation intended to reduce offshore tax evasion. Specifically, we study investment responses to the Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to report information to the U.S. government regarding U.S. account holders. We document a