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

47 Pages Posted: 13 Jun 2011 Last revised: 1 Mar 2013

See all articles by Kenneth J. Klassen

Kenneth J. Klassen

University of Waterloo - School of Accounting and Finance

Stacie Kelley Laplante

University of Wisconsin - Madison

Date Written: June 9, 2011

Abstract

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 $42 million ($43 million) of additional income per firm per year out of the U.S. relative to firms with low reinvestment-related (financial reporting) incentives.

Keywords: Income shifting, tax planning, financial reporting incentives, multinational corporations

JEL Classification: G38, H25, H32, M41

Suggested Citation

Klassen, Kenneth and Laplante, Stacie Kelley, The Effect of Foreign Reinvestment and Financial Reporting Incentives on Cross-Jurisdictional Income Shifting (June 9, 2011). Contemporary Accounting Research, Vol. 29, No. 3, pp. 928-955, Fall 2012 . Available at SSRN: https://ssrn.com/abstract=1863988 or http://dx.doi.org/10.2139/ssrn.1863988

Kenneth Klassen

University of Waterloo - School of Accounting and Finance ( email )

Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x38550 (Phone)
519-888-7562 (Fax)

Stacie Kelley Laplante (Contact Author)

University of Wisconsin - Madison ( email )

975 University Avenue
Madison, WI 53706
United States
608-265-3494 (Phone)
608-265-3494 (Fax)

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