Multinationals' income shifting decisions, taxes and intra-company transfers: empirically testing market valuation
AbstractThis paper tests whether intra-company transfers, viewed as distinct from ordinary sales transactions by policy makers and tax regulators, are associated with share price. When a multinational firm (MNC) transfers its intermediate goods between the parent company and its foreign subsidiary, its discretion over the price of goods can result in shifting income from a high tax to a low tax regime, reducing its overall tax liabilities. Intuitively, these tax savings represent an incremental value to the firm's shareholders. Thus, employing a variant of Ohlson's (1995) equity-valuation model, we test and document that firms that engage in intra-company transfers are rewarded with higher equity value. This is consistent with intra-company transaction choices significantly influencing firm value and opportunistic transfer pricing having market benefits. We also examine whether international transfers are connected to foreign pretax profit margins and foreign tax costs. Consistent with prior works (Klassen et al., 1993; Pak and Zdanowicz, 1994; Gramlich and Wheeler, 2003), we document that foreign pretax income and tax costs are positively related to intra-firm transfers, indicating that US multinationals shifted income away from the USA from 1998 to 2002.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Inderscience Enterprises Ltd in its journal Int. J. of Accounting and Finance.
Volume (Year): 2 (2010)
Issue (Month): 1 ()
Contact details of provider:
Web page: http://www.inderscience.com/browse/index.php?journalID=231
intra-company transfers; market values; foreign pre-tax income; tax costs; multinational corporations; MNCs; income shifting; decision making; taxes; sales transactions; policy makers; regulators; share prices; intermediate goods; parent companies; foreign subsidiaries; pricing; tax regimes; tax liabilities; tax savings; incremental values; shareholders; Ohlson's equity valuation model; equity value; firm value; transfer pricing; pre-tax profit margins; taxation; United States; USA; accounting; finance.;
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Graham Langley).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.