Network Effect and Tax Planning in IT Companies’ Global Entry Decisions

Posted: 24 Oct 2019 Last revised: 1 Jun 2020

See all articles by Baozhuang Niu

Baozhuang Niu

School of Business Administration, South China University of Technology

Zihao Mu

South China University of Technology - School of Business Administration (SBA)

Lei Chen

affiliation not provided to SSRN

Yong Jin

The Hong Kong Polytechnic University - School of Accounting and Finance

Hsing Kenneth Cheng

University of Florida - Warrington College of Business

Date Written: October 15, 2019

Abstract

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.

Suggested Citation

Niu, Baozhuang and Mu, Zihao and Chen, Lei and Jin, Yong and Cheng, Hsing Kenneth, Network Effect and Tax Planning in IT Companies’ Global Entry Decisions (October 15, 2019). Available at SSRN: https://ssrn.com/abstract=3470094

Baozhuang Niu (Contact Author)

School of Business Administration, South China University of Technology ( email )

Wushan
Guangzhou, AR Guangdong 510640
China

Zihao Mu

South China University of Technology - School of Business Administration (SBA) ( email )

Wushan
Guangzhou
China

Lei Chen

affiliation not provided to SSRN

Yong Jin

The Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hong Kong

Hsing Kenneth Cheng

University of Florida - Warrington College of Business ( email )

P.O. Box 117169
Gainesville, FL 32611-7169
United States
352-392-7068 (Phone)
352-392-5438 (Fax)

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