Essays on International Tax and Firm Behavior
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This dissertation examines unique tax incentives faced by multinational corporations (MNCs). Although nearly all businesses engage in profit-maximizing behavior, many do not have the ability to set up numerous subsidiaries in multiple jurisdictions. MNCs, on the other hand, often operate in a global context. The largest MNCs have hundreds of related subsidiaries that are distributed worldwide. Firms can utilize this geographic dispersion to take advantage of heterogeneity in tax laws across the jurisdictions in which they operate to minimize their tax burden. In the following chapters, I examine (1) common mechanisms used by some of the largest MNCs that facilitate the movement of income from high-tax jurisdictions to low-tax jurisdictions, (2) the extent to which researchers can trust different sources of data to measure the foreign activity of MNCs, and (3) how regulatory uncertainty concerning tax regimes can distort various aspects of firm behavior and financial reporting.
The second chapter studies the adoption and use of specific forms of tax planning by US multinational corporations (MNCs). Along with my coauthors, I use IRS data to identify hybrid tax planning affiliates (HTPs) that allow MNCs to avoid corporate income taxes by targeting mismatches between US and Irish, Dutch, and Luxembourg tax law. By 2016, we find that more than 35\% of the foreign profits of US MNCs were linked to these HTPs. Difference-in-difference models reveal that, after adoption, corporations intensify behavior commonly linked to profit shifting, significantly increasing related-party loans, book values of foreign intangible assets, and profits held abroad relative to control MNCs. These changes coincide with stark reductions in foreign effective tax rates. MNCs that adopt HTPs also experience large increases in foreign tangible assets and in domestic R\&D, payroll, and investment relative to other types of multinationals. To separate selection and treatment effects, we develop and estimate a model that rationalizes the selection of MNCs into HTPs and the changes that we observe in their reported economic activity.
The third chapter examines whether data that is commonly used to study MNCs can be trusted by researchers. Recent literature has noted the potential for significant measurement error, unique to MNCs, in tax and accounting data. I examine a key source of measurement error that can affect administrative tax data --- aggregation error. I link data from tax filings and public disclosures to quantify the extent to which commonly-used aggregation techniques may result in double counting of foreign earnings. A comparison of book and tax data reveals that aggregation error has been increasing over time. The matched sample also reveals large inconsistencies in the reporting of corporate income tax across firms' books and tax filings, particularly in extractive and financial industries. I introduce a simple correction for aggregation error and examine the extent to which it harmonizes measurement of foreign income and tax rates across firms' books and tax filings. Applying this correction yields a 30% reduction in the magnitude of foreign earnings as measured in tax data in 2016 and significantly reduces book-tax differences. Furthermore, this correction breaks the systematic relationship between book-tax differences and the size of multinationals' foreign affiliate networks. Unadjusted book-tax differences are increasing over time. After applying the correction, this is no longer true. Finally, I replicate estimates from prior literature that do not correct for aggregation error and discuss robustness.
The fourth chapter examines how MNCs reacted to a regulatory loophole that emerged after the implementation of transfer pricing regulations passed in 1995. This loophole allowed US-based MNCs to shift labor costs from low-tax foreign affiliates to US parent companies by utilizing stock-based compensation. A 2005 tax court ruling created regulatory uncertainty around enforcement of the loophole, increasing the market value of firms that were in a position to take advantage of it. This period of regulatory uncertainty extended for over a decade. During this period, exposed firms increased their overall usage of stock-based compensation and its relative intensity as a share of their total labor costs. Exposed firms also increased their overall R&D activity and claimed domestic tax credits for larger portions of their overall R&D expense.
Boller, Lysle Thomas (2023). Essays on International Tax and Firm Behavior. Dissertation, Duke University. Retrieved from https://hdl.handle.net/10161/29197.
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