Using IRS Data to Identify Income Shifting to Foreign Affiliates
54 Pages Posted: 9 Aug 2014 Last revised: 24 Aug 2017
Date Written: August 23, 2017
We use confidential Internal Revenue Service (IRS) data on the magnitude of U.S.-foreign intercompany transactions to develop a financial statement-based measure of the likelihood that U.S. multinational entities (MNEs) make net intercompany payments out of the U.S. Descriptive analysis shows that although sample firms report net inbound intercompany payments on average, high tech firms and small firms report average net outbound payments. The determinants of net outbound payments vary with size, but the likelihood that a firm reports net outbound payments is positively related to high tech operations and income tax incentives across all firms. Supplemental analyses show that firms with net outbound payments have historically not been more likely to be audited or assessed additional taxes upon IRS audit. Our study provides a validated measure based on publicly available data that researchers, investors, and policymakers can use to infer a substantial form of income shifting.
Keywords: IRS audit, tax avoidance, international tax, income shifting
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