Does a Common Set of Accounting Standards Affect Tax-Motivated Income Shifting for Multinational Firms?

Posted: 6 Jun 2015 Last revised: 3 Aug 2016

See all articles by Lisa De Simone

Lisa De Simone

Stanford Graduate School of Business

Date Written: June 5, 2015

Abstract

I test whether adoption of IFRS by individual affiliates of multinational entities (MNEs) for unconsolidated financial reporting facilitates tax-motivated income shifting. MNEs often justify transfer prices to tax authorities by benchmarking intercompany profit allocations against a range of book profit rates reported by economically comparable, independent firms that use similar accounting standards. Additional qualifying benchmark firms resulting from IFRS adoption could allow managers to support more tax-advantaged transfer prices. Using a database of European unconsolidated financial and ownership information over 2003 to 2012, I first document an increase in the arm’s length range of book profits reported by potential IFRS benchmark firms following affiliate adoption of IFRS. I then estimate a statistically and economically significant 11.3 percent tax-motivated change in reported book pre-tax profits following affiliate IFRS adoption, relative to pre-adoption and non-adopter affiliate-years.

Keywords: IFRS, income shifting, international tax, multinational organizations

Suggested Citation

De Simone, Lisa, Does a Common Set of Accounting Standards Affect Tax-Motivated Income Shifting for Multinational Firms? (June 5, 2015). Journal of Accounting & Economics (JAE), Vol. 61, 2016; Stanford University Graduate School of Business Research Paper No. 15-36. Available at SSRN: https://ssrn.com/abstract=2615007

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

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