The Effect of Non-U.S. Tax Authority Monitoring on U.S. Multinationals’ Affiliates Income Shifting: Evidence from EDGAR Search Activity

Abstract

We investigate the determinants and consequences of the monitoring activity of foreign tax authorities (FTAs) for U.S. multinational enterprises (MNEs). Using a novel dataset of downloads of U.S. MNEs’ 10-K filings by FTAs, we find that countries’ corporate tax rate and MNEs’ local affiliate size are positively associated with local FTA monitoring, consistent with FTAs in high tax countries being concerned with tax base erosion to low tax countries. Importantly, we find that the affiliates collectively engage in less income shifting from high tax countries to low tax countries when aggregate FTA monitoring across the group is higher. Consistent with the coordination and enforcement channels, the deterrence effect of aggregate FTA monitoring concentrates among the subsample where the monitoring FTAs experience greater improvements in information exchange under tax treaties and when the strength of monitoring FTAs is stronger. Additional analyses documenting positive associations between aggregate FTA monitoring and subsequent foreign and cash-effective tax rates of U.S. MNEs further corroborate the deterrence effect of aggregate FTA monitoring.

Keywords: tax authority monitoring, income shifting, tax avoidance, tax coordination

JEL Classification: H20, H25, H26, H32, K22, L51, M41, M48