A Model of the Cost of Income Shifting with an Application to Tax Planning and E-Commerce

39 Pages Posted: 1 Mar 2013  

Kenneth J. Klassen

University of Waterloo - School of Accounting and Finance

Stacie Kelley Laplante

University of Wisconsin - Madison

Date Written: February 28, 2013

Abstract

This manuscript develops a model that incorporates income shifting into investments by U.S. multinationals in their foreign subsidiaries. The model demonstrates that, while there is always an incentive to shift income into the U.S. from high foreign tax rate subsidiaries, income shifting out of the U.S. to low tax rate countries occurs only when the required rate of return on foreign investments is low (repatriations are unlikely), i.e., it is not always optimal to shift to low-tax-rate countries. It also shows that the optimal amount of shifting relates to the interplay of costs and the tax rate differential. We apply the model to examine a setting where cross-sectional costs of income shifting likely vary based on the extent to which a firm is engaged in electronic commerce. Electronic commerce potentially alleviates costs by making it easier for firms to strategically locate sales among foreign jurisdictions, and to shift sales between domestic and foreign locations to benefit from the relative taxation of the two. Consistent with our theory, we find firms in industries with high levels of e-commerce have lower cash effective tax rates, and this effect is magnified for firms that are less likely to have taxable repatriations.

Keywords: tax planning, e-commerce, income shifting

JEL Classification: G38, H25, H32, M41

Suggested Citation

Klassen, Kenneth J. and Laplante, Stacie Kelley, A Model of the Cost of Income Shifting with an Application to Tax Planning and E-Commerce (February 28, 2013). Available at SSRN: https://ssrn.com/abstract=2226544 or http://dx.doi.org/10.2139/ssrn.2226544

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)

Paper statistics

Downloads
217
Rank
112,113
Abstract Views
942