Inflexibility in Income Shifting: Implications, Detection and Remedies

28 Pages Posted: 12 Feb 2019 Last revised: 1 Nov 2021

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: October 14, 2021

Abstract

This study develops theory and discusses implications of inflexibility in tax-motivated income shifting. We show that inflexibility to adjust income-shifting strategies within a tax year in response to losses implies that income-shifting incentives are based on the expected rather than the statutory tax rate differential. This has important implications for empirical research as our finding suggests that using the statutory tax rate differential risks underestimating the tax sensitivity of income shifting. We propose several empirical remedies to mitigate the estimation bias stemming from inflexibility, whenever a direct test is not feasible. The remedies vary in their data requirements, which allows future work on tax sensitivities of income to take into account inflexibility.

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, Inflexibility in Income Shifting: Implications, Detection and Remedies (October 14, 2021). Available at SSRN: https://ssrn.com/abstract=3327666 or http://dx.doi.org/10.2139/ssrn.3327666

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 Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

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/

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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