The purpose of this paper is to examine the cross‐sectional relation between the value of cross‐border intrafirm transfers (CITs) and three dependent variables: return on investment (ROI), the US effective tax rate (ETRUS), and the global effective tax rate (ETRGL) to assess the existence or nonexistence of cross‐jurisdictional income shifting.
Regression analysis is used to test the relationship between CIT and accounting performance and effective tax rates.
The results indicate that ROI and ETRUS increase whereas ETRGL decreases with the extent of CITs after we control for variables that impact earnings and taxes (e.g. size, industry classification, internationalization, tax shelter, and growth). This suggests that firms earn income, on average, in jurisdictions with tax rates greater than the USA, such that diverting income from overseas to the USA is a tax‐saving action. The tax results are consistent with Jacob and Mills and Newberry's findings that firms shifted income into the USA. The results also reveal that companies that engage in CITs are those that are large, relatively more profitable, and pay more US taxes.
This study does not differentiate between transfer pricing schemes for tax minimization reasons from those done for earnings management purposes, which should be addressed by future research.
Results have public policy implications as an understanding of how CITs affect accounting performance and taxes is important for the craft of tax policy and transfer price regulation.
This study furthers our understanding of the impact of CITs on earnings and taxes, an important component of accounting research which has not been properly addressed by prior studies.
Olibe, K. and Rezaee, Z. (2008), "Income shifting and corporate taxation: the role of cross‐border intrafirm transfers", Review of Accounting and Finance, Vol. 7 No. 1, pp. 83-101. https://doi.org/10.1108/14757700810853860Download as .RIS
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