We investigate whether international income-shifting aggressiveness affects local investments. Amid heightened scrutiny of international activities by tax authorities, firms can support income-shifting goals by locating investments consistent with reported income. As a consequence, we predict firms that aggressively shift income will make affiliate-level investment decisions less influenced by local investment opportunities than firms that do not aggressively shift income. We use affiliate-level data from multinational corporations to develop a firm-year proxy for the sensitivity of reported income to cross-border tax incentives. Results suggest firm-years with below-median income-shifting aggressiveness exhibit a typical responsiveness of local investments to investment opportunities, but firm-years with above-median income-shifting aggressiveness exhibit no statistical relation. Consistent with expectations, these results are stronger for firms with better governance or subject to greater tax authority scrutiny. Our tests extend the literature on investment distortions by documenting that multinational corporations’ international tax considerations alter their local tangible investment decisions.

The Effect of Income-Shifting Aggressiveness on Corporate Investment

In this study, I review the empirical literature on the real effects of corporate taxation. I define real effects broadly as firms' investment responses, corporate risk taking, capital structure ch...

Real Effects of Corporate Taxation: A Review

Does Gambling Culture affect Firms’ Investment Efficiency?

The Tax Cuts and Jobs Act of 2017 (TCJA) reduces U.S. multinational companies’ (MNC) internal capital market frictions related to repatriation costs by decreasing costs to access internal capital (i.e., foreign cash). This study examines MNCs’ responses to the TCJA and finds spending and investment behavior are dependent upon liquidity, investment opportunities, and borrowing costs. Domestic capital expenditures increased for MNCs with low domestic liquidity and high domestic investment opportunities. These firms also increased share repurchases. In contrast, MNCs with low domestic liquidity and low domestic investment opportunities increased dividends. MNCs with low domestic investment opportunities and high cost of debt reduced their outstanding debt. We also investigate responses to global intangible low-taxed income (GILTI) incentives and find that MNCs with more foreign cash and a greater likelihood of being affected by the GILTI regime increase their foreign but not domestic capital expenditures - a potential unintended consequence of TCJA.

/pdf/early-evidence-on-the-use-of-foreign-cash-following-the-tax-5ekbtpze3b.pdf

Early Evidence on the use of Foreign Cash following the Tax Cuts and Jobs Act of 2017

This study aims to examine the effect of exchange rate fluctuations and credit supply on the dividend repatriation policy of foreign subsidiaries of U.S. multinational corporations (MNCs) around the world. The difference generalised method of moments (GMM) estimator was applied to estimate the dynamic dividend repatriation model. The results suggest that the appreciation of host-country currency against the USD leads to higher dividend repatriation by the foreign subsidiaries of U.S. MNCs. Moreover, results reveal that higher availability of private credit in the host country results in lower dividend repatriation by the U.S. MNCs’ foreign subsidiaries.

/pdf/influence-of-exchange-rate-fluctuations-and-credit-supply-on-13npr3t3wj.pdf

Influence of Exchange Rate Fluctuations and Credit Supply on Dividend Repatriation Policy of U.S. Multinational Corporations

Using a global sample of multinational corporations (MNCs) and their foreign subsidiaries, we find that repatriation taxes impair subsidiary-level investment efficiency. Consistent with internal agency conflicts between the central management of the MNC and the manager of the foreign subsidiary being the driver, we show that this effect is concentrated in subsidiaries with high information asymmetry and in subsidiaries that are weakly monitored. Quasi-natural experiments in the UK and Japan establish a causal relationship for our findings and suggest that a repeal of repatriation taxes increases subsidiary-level investment efficiency while reducing the level of investment. Our paper provides timely empirical evidence to inform expectations for the effects of a recent change to the U.S. international tax law that eliminated repatriation taxes from most of the future foreign earnings of U.S. MNCs.

Repatriation Taxes, Internal Agency Conflicts, and Subsidiary-level Investment Efficiency

Using a global sample of multinational corporations (MNCs) and their foreign subsidiaries, we find that repatriation taxes impair subsidiary-level investment efficiency. Consistent with internal agency conflicts between the central management of the MNC and the manager of the foreign subsidiary being the driver, we find that this effect is prevalent in subsidiaries with high information asymmetry, in subsidiaries that are weakly monitored, and subsidiaries of cash-rich MNCs. Natural experiments in the UK and Japan establish a causal relationship for our findings and suggest that a repeal of repatriation taxes increases subsidiary-level investment efficiency while reducing the level of investment. Our paper provides timely empirical evidence to inform expectations for the effects of a recent change to the U.S. international tax law which eliminated repatriation taxes from most of the future foreign earnings of U.S. MNCs.

Repatriation Taxes, Internal Agency Conflicts, and Subsidiary-Level Investment Efficiency

This study examines whether multinational corporations (MNCs) reclassify related-party payments to avoid the new base erosion and anti-abuse tax (BEAT) The Tax Cuts & Jobs Act of 2017 included the BEAT to combat income shifting from the US to foreign entities An exclusion in the tax law provides MNCs an incentive to reclassify related-party payments as cost of goods sold We use a triple-difference design that leverages the BEAT filing threshold of $500 million in revenue and the parent company’s location to document increases in the unconsolidated sales of foreign subsidiaries of MNCs subject to BEAT relative foreign subsidiaries of MNCs not subject to BEAT consistent with cost reclassification We also find this effect is strongest in MNCs with more related-party payments Overall, our results imply that firms use the subjectivity inherent in cost classification to reclassify costs as cost of goods sold to avoid the BEAT

'Just BEAT It' Do firms reclassify costs to avoid the base erosion and anti-abuse tax (BEAT) of the TCJA?

In this paper, we provide new evidence on the association of state ownership and tax planning and show that shareholders’ monitoring incentives affect a firm’s tax planning. Using the unique setting of the German corporate tax system, we distinguish between state owners that directly benefit from state-owned enterprises’ (SOEs’) income tax payments and those that do not. Our results indicate that the negative association between state ownership and tax planning is concentrated in SOEs where the state owner directly benefits from the tax payments. These results are robust to various specifications and suggest that shareholders’ monitoring incentives are a determinant of firms’ tax planning activities.

/pdf/monitoring-and-tax-planning-evidence-from-state-owned-4kp1oaxaug.pdf

David M. P. Samuel

Papers

Repatriation Taxes, Internal Agency Conflicts, and Subsidiary-level Investment Efficiency

Repatriation Taxes, Internal Agency Conflicts, and Subsidiary-Level Investment Efficiency

'Just BEAT It' Do firms reclassify costs to avoid the base erosion and anti-abuse tax (BEAT) of the TCJA?

Monitoring and Tax Planning – Evidence from State-Owned Enterprises