The Effect of Income-Shifting Aggressiveness on Corporate Investment
44 Pages Posted: 26 Aug 2018
Date Written: August 2018
We investigate whether intra-firm tax-motivated income shifting affects investment decisions. We model the complex interaction between two affiliates when the tax transfer price is related to an external market price. Our model predicts that increasing tax aggressiveness is associated with greater affiliate investment but lower investment efficiency. We use affiliate-level data on multinational corporations to develop a firm-specific measure of sensitivity to tax incentives to identify income-shifting aggressiveness. Using this measure, we estimate a positive relation between income-shifting aggressiveness and affiliate investment levels and a negative relation between income-shifting aggressiveness and affiliate investment efficiency. By empirically testing the theory that income-shifting aggressiveness alters equilibrium production decisions, we document that global after-tax profit maximization alters investment levels and extend the literature on investment distortions.
Keywords: Transfer Pricing, Income Shifting, Investment, Investment Efficiency
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