Implicit Corporate Taxes and Income Shifting

74 Pages Posted: 29 Jun 2017 Last revised: 12 Mar 2018

See all articles by Kevin Markle

Kevin Markle

University of Iowa - Henry B. Tippie College of Business

Lillian F. Mills

University of Texas at Austin - McCombs School of Business

Braden Williams

University of Texas at Austin - Department of Accounting

Date Written: March 7, 2018

Abstract

Implicit tax theory predicts that as capital moves to tax-favored investments, the expected pretax returns on those investments decrease. At the global level, this should create a positive relation between country-level tax rates and firm-level pretax returns. However, theory in income-shifting predicts reported pretax returns are inversely related to tax rates, as firms shift profits into lower-tax countries. We analytically model these two theories and empirically test our predictions in two samples of European firms: single-country firms and affiliates of multinational firms. In the sample of single-country firms, we find robust evidence of country-wide implicit taxes, but that this effect is driven by closed economies (non-EU countries). In the sample of multinational firms, we find that the effects of income shifting overwhelm the effects of implicit taxes. Our results imply that certain measures of income shifting estimated using reported profits can be understated when the effects of implicit taxes are ignored, but these effects are less problematic when the research setting includes mostly open economies. Our granular setting of multiple countries and affiliate level data helps explain prior research that finds decreasing corporate implicit tax effects over time, particularly for multinationals.

Keywords: implicit taxes, income shifting

JEL Classification: H25, H26

Suggested Citation

Markle, Kevin and Mills, Lillian F. and Williams, Braden, Implicit Corporate Taxes and Income Shifting (March 7, 2018). Available at SSRN: https://ssrn.com/abstract=2993950 or http://dx.doi.org/10.2139/ssrn.2993950

Kevin Markle (Contact Author)

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

Acquisitions
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Iowa City, IA 52242-1000
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Lillian F. Mills

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Braden Williams

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States

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