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Tax-avoidance strategies of American multinationals: an empirical analysis

  • Peter Schwarz

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

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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File URL: http://hdl.handle.net/10.1002/mde.1471
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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
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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  1. Grubert, Harry & Mutti, John, 1991. "Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 285-93, May.
  2. Chris Doyle & Sweder Wijnbergen, 1994. "Taxation of foreign multinationals: A sequential bargaining approach to tax holidays," International Tax and Public Finance, Springer, vol. 1(3), pages 211-225, October.
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  17. Palan, Ronen, 2002. "Tax Havens and the Commercialization of State Sovereignty," International Organization, Cambridge University Press, vol. 56(01), pages 151-176, December.
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  19. 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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