Are U.S. Multinational Corporations Becoming More Aggressive Income Shifters?

Abstract

This paper examines income shifting of U.S. multinational companies over the past two decades. Domestic and foreign policymakers are increasingly concerned with the effect of income shifting on dwindling tax revenues, however, extant research on income shifting by U.S. multinational enterprises is mixed. We address the disconnect between the academic literature and the policymaker’s perceptions by examining the extent of multijurisdictional income shifting by U.S. multinational companies. We directly address conflicting results in extant literature and show that using either multi-period proxies or instrumental variables overcome weaknesses of annual proxies in this setting. Our tests show that U.S. companies have become more active at shifting income out of the U.S. as the regulatory costs of shifting have changed. Holding tax rate differences between U.S. and foreign jurisdictions constant, our empirical estimates suggest that our sample of 380 corporations with low average foreign tax rates collectively shift approximately $10 billion of additional income out of the U.S. annually during 2005-2009 relative to 1998-2002 due to varying regulatory costs of shifting.

Keywords: Income shifting, tax planning

JEL Classification: G38, H25, H32, M41