Unprofitable Affiliates and Income Shifting Behavior

Forthcoming, The Accounting Review

Posted: 16 Oct 2013 Last revised: 2 Jul 2016

See all articles by Lisa De Simone

Lisa De Simone

Stanford Graduate School of Business

Kenneth J. Klassen

University of Waterloo - School of Accounting and Finance

Jeri K. Seidman

University of Virginia - McIntire School of Commerce

Date Written: June 7, 2016

Abstract

Income shifting from high-tax to low-tax jurisdictions is considered a primary method of reducing worldwide tax burdens of multinational firms. Current losses also affect income-shifting incentives. We extend prior approaches by explicitly considering unprofitable affiliates and test whether the association between losses and tax incentives for unprofitable affiliates deviates from the negative association observed in profitable affiliates. Results suggest that multinational firms alter the distribution of reported profits to take advantage of losses. Our point estimate for profitable affiliates implies that an increase of one standard deviation in the tax incentive, C, of an affiliate with average return on assets of 13.3 is associated with a lower return on assets of 0.5 percentage points. The same change in tax incentive of an unprofitable affiliate is associated with an increase in its return on assets of approximately 0.7 percentage points, holding assets, labor, productivity and other factors constant. We further document a larger responsiveness to tax incentives between profitable and unprofitable affiliates in high-tax jurisdictions, consistent with predictions.

Keywords: transfer pricing, income shifting, losses

Suggested Citation

De Simone, Lisa and Klassen, Kenneth and Seidman, Jeri K., Unprofitable Affiliates and Income Shifting Behavior (June 7, 2016). Forthcoming, The Accounting Review. Available at SSRN: https://ssrn.com/abstract=2340693 or http://dx.doi.org/10.2139/ssrn.2340693

Lisa De Simone (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-3874 (Phone)
650-724-3083 (Fax)

HOME PAGE: http://www.gsb.stanford.edu/faculty-research/faculty/lisa-de-simone

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)

Jeri K. Seidman

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

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