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

72 Pages Posted: 13 Dec 2019 Last revised: 18 Sep 2020

See all articles by Jeremiah Harris

Jeremiah Harris

Kent State University - College of Business Administration

William O'Brien

University of Illinois at Chicago

Date Written: September 17, 2020

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

Suggested Citation

Harris, Jeremiah and O'Brien, William, Inversions, Profit Shifting, and Tax-Free Repatriations: An Examination of U.S. Multinationals’ Choice of Tax Strategies (September 17, 2020). Available at SSRN: https://ssrn.com/abstract=3493922 or http://dx.doi.org/10.2139/ssrn.3493922

Jeremiah Harris (Contact Author)

Kent State University - College of Business Administration ( email )

P.O. Box 5190
Kent, OH 44242-0001
United States

William O'Brien

University of Illinois at Chicago ( email )

601 S. Morgan St.
Chicago, IL 60607
United States

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