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A Comparison of the Tax-motivated Income Shifting of Multinationals in Territorial and Worldwide Countries

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  • Kevin S Markle

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    (Dartmouth College)

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    Abstract

    This paper tests for differences in the tax-motivated income shifting behaviors of multinationals subject to different systems of taxing foreign earnings. I find that multinationals subject to territorial tax regimes shift more income than those subject to worldwide tax regimes, but that the difference in shifting is not statistically different when the worldwide firms can defer repatriation of the shifted income. I also find that the difference in shifting is greater when the multinational is cash-constrained in its home country. In additional tests, I find that worldwide firms bear the dead-weight cost of having cash trapped in foreign subsidiaries while territorial firms do not.

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    File URL: http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/WP1206.pdf
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    Bibliographic Info

    Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 1206.

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    Date of creation: 2012
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    Handle: RePEc:btx:wpaper:1206

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    Keywords: income shifting; multinational; worldwide; territorial; exemption; credit; international tax;

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    1. Barrios, Salvador & Huizinga, Harry & Laeven, Luc & Nicodeme, Gaetan, 2008. "International Taxation and Multinational Firm Location Decisions," CEPR Discussion Papers 7047, C.E.P.R. Discussion Papers.
    2. Gramlich, J.D.Jeffrey D. & Limpaphayom, Piman & Ghon Rhee, S., 2004. "Taxes, keiretsu affiliation, and income shifting," Journal of Accounting and Economics, Elsevier, vol. 37(2), pages 203-228, June.
    3. Roger H. Gordon & James R. Hines Jr., 2002. "International Taxation," NBER Working Papers 8854, National Bureau of Economic Research, Inc.
    4. David G. Hartman, 1985. "Tax Policy and Foreign Direct Investment in the United States," NBER Working Papers 0967, National Bureau of Economic Research, Inc.
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    8. Dana Hajkova & Giuseppe Nicoletti & Laura Vartia & Kwang-Yeol Yoo, 2006. "Taxation, Business Environment and FDI Location in OECD Countries," OECD Economics Department Working Papers 502, OECD Publishing.
    9. Harry Huizinga & Luc Laeven, 2006. "International profit shifting within multinationals: a multi-country perspective," European Economy - Economic Papers 260, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
    10. Ruud A. de Mooij & Sjef Ederveen, 2001. "Taxation and Foreign Direct Investment: A Synthesis of Empirical Research," CESifo Working Paper Series 588, CESifo Group Munich.
    11. David Harris & Randall Morck & Joel Slemrod & Bernard Yeung, 1991. "Income Shifting in U.S. Multinational Corporations," NBER Working Papers 3924, National Bureau of Economic Research, Inc.
    12. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
    13. Rosanne Altshuler, 2000. "Recent Developments in the Debate on Deferral," Departmental Working Papers 200013, Rutgers University, Department of Economics.
    14. C. Fritz Foley & Jay C. Hartzell & Sheridan Titman & Garry Twite, 2006. "Why do firms hold so much cash? A tax-based explanation," NBER Working Papers 12649, National Bureau of Economic Research, Inc.
    15. Michael P Devereux, 2007. "The Impact of Taxation on the Location of Capital, Firms and Profit: a Survey of Empirical Evidence," Working Papers 0702, Oxford University Centre for Business Taxation.
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