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Inflexibility in Income Shifting: Implications, Detection and Remedies

Author

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  • Arnt Ove Hopland
  • Petro Lisowsky
  • Mohammed Mardan
  • Dirk Schindler

Abstract

This study develops theory and discusses implications of inflexibility in tax-motivated income shifting. We show that inflexibility to adjust income-shifting strategies within a tax year in response to losses implies that income-shifting incentives are based on the expected rather than the statutory tax rate differential. This has important implications for empirical research as our finding suggests that using the statutory tax rate differential risks underestimating the tax sensitivity of income shifting. We propose several empirical remedies to mitigate the estimation bias stemming from inflexibility, whenever a direct test is not feasible. The remedies vary in their data requirements, which allows future work on tax sensitivities of income to take into account inflexibility.

Suggested Citation

  • Arnt Ove Hopland & Petro Lisowsky & Mohammed Mardan & Dirk Schindler, 2021. "Inflexibility in Income Shifting: Implications, Detection and Remedies," CESifo Working Paper Series 9384, CESifo.
    • Handle: RePEc:ces:ceswps:_9384
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    References listed on IDEAS

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    1. Ji Lee, Ye & Seon Yoo, Ji, 2023. "Loss expectation and income shifting," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(2).

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    More about this item

    Keywords

    income shifting; losses; debt shifting; transfer prices;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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