Foreign Employment, Income Shifting, and Tax Uncertainty
58 Pages Posted: 15 Aug 2018 Last revised: 27 Nov 2019
Date Written: November 25, 2019
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
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