Foreign Employment, Income Shifting, and Tax Uncertainty

58 Pages Posted: 15 Aug 2018 Last revised: 27 Nov 2019

See all articles by Katharine D. Drake

Katharine D. Drake

University of Arizona - Department of Accounting

Nathan C. Goldman

North Carolina State University - Department of Accounting

Frank Murphy

University of Connecticut - Department of Accounting

Date Written: November 25, 2019

Abstract

We examine whether foreign employment facilitates income shifting and reduces tax uncertainty of foreign transactions. Using a hand-collected sample of employment disclosures, we partition the sample into firm-years with higher or lower levels of foreign employment, controlling for economic determinants of foreign employment. Using two distinct income-shifting models, we document that, on average, high foreign employment is associated with greater tax-motivated income shifting out of the U.S. We also posit and find that high foreign employment lends legitimacy and enhances the economic substance of foreign transactions, reducing the tax uncertainty associated with foreign income. We conduct additional analyses to mitigate selection bias concerns, and we utilize exogenous changes to the costs and benefits of income shifting using employees to strengthen identification. Our results highlight firms’ use of employees as part of a tax-efficient supply chain and how income shifting is not limited to intangible property and intercompany debt.

Keywords: foreign employees, income shifting, effective tax rates, uncertain tax benefits

Suggested Citation

Drake, Katharine D. and Goldman, Nathan C. and Murphy, Frank, Foreign Employment, Income Shifting, and Tax Uncertainty (November 25, 2019). University of Connecticut School of Business Research Paper No. 18-23. Available at SSRN: https://ssrn.com/abstract=3231948 or http://dx.doi.org/10.2139/ssrn.3231948

Katharine D. Drake

University of Arizona - Department of Accounting ( email )

Tucson, AZ 85721
United States

Nathan C. Goldman

North Carolina State University - Department of Accounting ( email )

Raleigh, NC 27695-8113
United States

Frank Murphy (Contact Author)

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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