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Unprofitable Affiliates and Income Shifting Behavior

The Accounting review, 2017-05, Vol.92 (3), p.113-136 [Peer Reviewed Journal]

2017 American Accounting Association ;Copyright American Accounting Association May 2017 ;ISSN: 0001-4826 ;ISSN: 1558-7967 ;EISSN: 1558-7967 ;DOI: 10.2308/accr-51555

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  • Title:
    Unprofitable Affiliates and Income Shifting Behavior
  • Author: De Simone, Lisa ; Klassen, Kenneth J. ; Seidman, Jeri K.
  • Subjects: Affiliates ; Assets ; Deviation ; Holding ; Income shifting ; Income taxes ; Losses ; Multinational corporations ; Productivity ; Profits ; Responsiveness ; Tax incentives ; Taxation ; Transfer pricing
  • Is Part Of: The Accounting review, 2017-05, Vol.92 (3), p.113-136
  • Description: 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.
  • Publisher: Sarasota: American Accounting Association
  • Language: English
  • Identifier: ISSN: 0001-4826
    ISSN: 1558-7967
    EISSN: 1558-7967
    DOI: 10.2308/accr-51555
  • Source: University of Waterloo UWSpace
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