Network Effect and Tax Planning in IT Companies’ Global Entry Decisions
Posted: 24 Oct 2019 Last revised: 1 Jun 2020
Date Written: October 15, 2019
Many U.S. IT companies began to realize the important role of tax planning in recent years and started strategically establishing retail subsidiaries in favorable tax jurisdictions. Significant increase of after-tax profits can be achieved by internally trading their own intellectual properties, such as software and operating systems, with the subsidiary. This study is among the first to examine the impact of both tax planning and network effect on IT companies’ market entry incentives in both the high-to-low scenario (the foreign market’s tax rate is lower than U.S.) and the low-to-high scenario (the foreign market’s tax rate is higher than U.S.). Several intriguing findings are discovered highlighting the complicated interactions between the degree of tax disparity and network effect. We further examine how IT companies’ incentives may change with the introduction of the two major reforms, namely the tax deferral termination and U.S. corporate income tax rate reduction in the U.S. Tax Cuts and Jobs Act of 2017.
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