Flexibility in Income Shifting Under Losses

Posted: 20 Sep 2017 Last revised: 22 Jul 2018

See all articles by Arnt Hopland

Arnt Hopland

Norwegian School of Economics (NHH)

Petro Lisowsky

Boston University Questrom School of Business; Norwegian Center for Taxation

Mohammed Mardan

Norwegian Center for Taxation; Norwegian School of Economics (NHH) - Department of Business and Management Science; CESifo (Center for Economic Studies and Ifo Institute)

Dirk Schindler

Erasmus School of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 7, 2017

Abstract

This study examines the flexibility of multinational firms to adjust their income-shifting strategies -- whether using transfer pricing or internal debt -- during the tax year to react to affiliates' operating losses. We develop the concept that under flexibility, multinationals can adjust their inter-affiliate payments ex post (i.e., after financial outcomes are revealed, but before the end of the tax year), to minimize worldwide tax payments. Without flexibility, multinationals must commit to their affiliates' income-shifting strategies ex ante (i.e., before financial outcomes are revealed). Our central prediction is that under ex-post income shifting, loss affiliates report lower transfer prices and internal leverage than profitable affiliates; under ex-ante income shifting, affiliates report the same transfer prices and internal capital structure, regardless of making losses. Using novel data on direct transfer payments and internal debt of Norwegian affiliates, we find empirical evidence that transfer pricing, particularly related to user fees, but not internal debt, provides flexibility to adjust income shifting ex post. In additional tests, we confirm that our results reflect flexibility rather than loss affiliates' poor performance. Our study should interest tax policymakers and researchers by identifying how various mechanisms allow multinational firms to shift income when they face losses.

Keywords: income shifting, losses, debt shifting, transfer prices

JEL Classification: F23, H25, H87

Suggested Citation

Hopland, Arnt and Lisowsky, Petro and Mardan, Mohammed and Mardan, Mohammed and Schindler, Dirk, Flexibility in Income Shifting Under Losses (July 7, 2017). The Accounting Review, Vol. 93 No. 3, 2018, Available at SSRN: https://ssrn.com/abstract=3038891

Arnt Hopland

Norwegian School of Economics (NHH)

Helleveien 30
Bergen, NO-5045
Norway

Petro Lisowsky (Contact Author)

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Ste. 518H
Boston, MA 02215
United States
6173532661 (Phone)

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

Mohammed Mardan

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

HOME PAGE: http://sites.google.com/site/webpagemohammedmardan/

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Dirk Schindler

Erasmus School of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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