Does Tax-Motivated Income Shifting by U.S. Multinational Corporations Impair the Comparability of Foreign Earnings?

• In Event: New Faculty/Doctoral Session II

Abstract

We examine whether income shifting by U.S. multinational corporations (MNCs) affects the comparability of their foreign earnings. Specifically, we focus on domestic income shifted out of the U.S. because the typical U.S. MNC faces an average foreign tax rate below the U.S. statutory rate. If investors value the foreign earnings of income shifting firms as a combination of both foreign and domestic earnings, we expect this to reduce the comparability of foreign earnings of income shifting firms relative to that of non-income shifting firms. We adapt the comparability measure from De Franco et al. (2011) to construct a new measure of pre-tax foreign earnings comparability. Consistent with our prediction, we find that tax-motivated income shifting is negatively associated with our measure of foreign earnings comparability. This reduction in the comparability of reported foreign earnings represents a non-tax cost of tax-motivated income shifting.

Authors

• Ciao-Wei Chen, University of Iowa

• Bradford Fitzgerald Hepfer, University of Iowa

• Phillip James Quinn, University of Iowa

• Ryan James Wilson, University of Iowa