Inversions, Profit Shifting, and Tax-Free Repatriations: An Examination of U.S. Multinationals’ Choice of Tax Strategies

Abstract

We examine U.S. multinationals’ choice of tax avoidance strategies. We find that firms capable of one strategy (profit shifting) are less likely to use a different strategy (inversion), even though inverting would eliminate higher repatriation-related taxes faced by profit-shifting firms. Three inversion-specific costs may contribute to these preferences. After exogenous foreign tax cuts make shifting more valuable and increase potential repatriation costs, profit shifters’ debt ratios increase and they increasingly utilize tax-free repatriation techniques; we provide several examples of these lesser-known strategies. Shifting and tax-free repatriations, both of which are still used by U.S. firms, may therefore substitute for inversions.

Keywords: Inversions, Taxes, Multinational Firms, Corporate Innovation

JEL Classification: G3, G34, G38, H26, H32