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Tax-avoidance strategies of American multinationals: an empirical analysis

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  • Peter Schwarz

    (Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung, Wiesbaden, Germany)

Abstract

This paper analyzes the opportunities of American multinationals to reallocate their profits into tax havens. In contrast to previous papers, a comprehensive look on the profit-shifting process is undertaken by proposing three different tests. Multinationals in high-tax countries have a lower equity ratio than affiliates in tax havens, indicating that income is shifted by extensively financing subsidiaries in high-tax countries with debt. Furthermore, the share of retained earnings is lower in high-tax countries owing to the unattractiveness of tax deferral. When testing for the outcomes of profit shifting, the results show that the pre-tax profitability of American multinationals is higher in tax havens. This relationship is consistent with the opportunities of multinationals to shift income outside high-tax jurisdictions. Finally, the paper shows that profit shifting largely takes place into tax havens, whereas other countries do not benefit from profit-shifting activities. Copyright © 2009 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 30 (2009)
Issue (Month): 8 ()
Pages: 539-549

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Handle: RePEc:wly:mgtdec:v:30:y:2009:i:8:p:539-549

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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  12. Haufler, Andreas & Schjelderup, Guttorm, 2000. "Corporate tax systems and cross country profit shifting," Munich Reprints in Economics 20419, University of Munich, Department of Economics.
  13. Desai, Mihir A. & Foley, C. Fritz & Hines, James Jr., 2006. "Do tax havens divert economic activity?," Economics Letters, Elsevier, vol. 90(2), pages 219-224, February.
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Cited by:
  1. Heckemeyer, Jost H. & Overesch, Michael, 2013. "Multinationals' profit response to tax differentials: Effect size and shifting channels," ZEW Discussion Papers 13-045, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Alexander Rogach & Tetyana Balyuk, 2012. "Intra-Firm Transactions of TNCs in Ukraine: Empirical Investigation," Transition Studies Review, Springer, vol. 18(3), pages 586-600, March.

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