The Effect of Financial Constraints on Tax-Motivated Income Shifting by U.S. Multinationals

56 Pages Posted: 7 Oct 2013 Last revised: 13 Aug 2015

See all articles by Scott Dyreng

Scott Dyreng

Duke University - Accounting

Kevin Markle

University of Iowa - Henry B. Tippie College of Business

Date Written: May 14, 2015

Abstract

When a U.S. multinational corporation shifts income from the U.S. to foreign jurisdictions, it incurs costs and reaps benefits. The benefits may be reduced if the shifted income must be returned to the U.S. as a dividend in the short term and face the same U.S. tax it would have if the income had not been shifted. Firms, then, have incentive to defer repatriation of earnings and to fund domestic cash needs with external financing. The cost of external financing, however, is increasing in financial constraints, leading to the prediction that constrained firms will be unable to defer repatriation and, therefore, will reap no benefits from shifting. Consistent with this prediction, we find that financially constrained firms shift less income from the U.S. to foreign countries than their unconstrained peers. We estimate that financially constrained firms shift out 20% less of pre-shifted income than unconstrained firms. Translating this percentage to dollar values, the mean (median) constrained firm shifts $16 million ($7 million) out of the U.S. each year while the mean (median) unconstrained firm shifts $321 million ($134 million) out of the U.S. each year. Assuming that the inability to defer repatriation is the primary constraint preventing the U.S. worldwide tax system from being a de facto territorial system, we use our findings to estimate that changing to a pure territorial tax system would increase outbound income shifting by U.S. multinationals by 8%.

Suggested Citation

Dyreng, Scott and Markle, Kevin, The Effect of Financial Constraints on Tax-Motivated Income Shifting by U.S. Multinationals (May 14, 2015). Available at SSRN: https://ssrn.com/abstract=2336997 or http://dx.doi.org/10.2139/ssrn.2336997

Scott Dyreng (Contact Author)

Duke University - Accounting ( email )

Box 90120, Fuqua School of Business
Durham, NC 27708-0120
United States

Kevin Markle

University of Iowa - Henry B. Tippie College of Business ( email )

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319-335-1956 (Fax)

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