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INTERNATIONAL TAX RESEARCH BEYOND APB 23: PART DEUX

Jennifer Blouin2015 ATA Doctoral Consortium

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Broad Areas of Recent Work

1. Role of taxes on investment

2. Role of taxes on transfer pricing

3. Role of accounting for income taxes on foreign investment

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What is an accountant’s comparative advantage?

1. We understand the numbers

2. We understand that, if tax policy affects financial

statements, there could be unintended

consequences

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1. Role of taxes on investment

• Do taxes affect the location and amount of investment?− Yes - Old work focuses on identifying the marginal source of

foreign direct investment (retained earnings v. contributed

capital)

• Hartman (1985), Boskin and Gale (1987), Sinn (1993, 1991),

Hines and Rice (1994) etc.

− Recent work examines overinvestment in foreign M&A

• Edwards et al. (2014); Hanlon et al. (2014)

− Fruitful new work – U.S. investment by foreign firms:

• Does the U.S. system unfairly advantage foreign buyers in

the U.S. M&A market? Bird et al. (2014)

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• Do taxes affect the repatriation of foreign earnings?

− Although theory suggests otherwise, Hartman

(1985), many studies find that taxes do matter in

repatriation decisions

• Kopits (1972); Mutti (1981); Hines and Hubbard (1990);

Goodspeed and Frisch (1989); Altshuler and Newlon

(1993); Desai, Foley and Hines (2001, 2007) etc.

− Why the disparity between Hartman and the

empirical work?

1. Role of taxes on investment con’t

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Altshuler, Newlon, and Randolph (1995)

“None of the analyses mentioned on the prior slide

has departed from the Hartman result: The level of

the repatriation tax does not by itself affect the

incentive to repatriate income rather than reinvest it”.

Each of these papers have included settings where there is

firm-created intertemporal variation in the repatriation taxes

Transitory v. permanent repatriation tax rates

• The American Jobs Creation Act of 2004− Blouin Krull (2009), Dharmapala et al. (2011),

Faulkender Peterson (2012)

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An Aside: Nine years later, we are still debating the efficacy of the AJCA…

Brennan (2014) Where the Money Really Went: A New Understanding of the AJCA Tax Holiday, Northwestern Law School Working Paper

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Why? Because the AJCA response matters in the multinational tax reform debate

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Potential future work on repatriation activity

• Where did all of the AJCA funds go?

• What would happen if the worldwide tax system is repealed?

• What is the role of financial constraints on repatriation activity?

Are U.S. firms really constrained by our system?

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2. Role of taxes on transfer pricing

• Shifting out of high-tax foreign into lower-tax foreign/US creates permanent tax savings

• Shifting from US into low-tax foreign creates deferral of taxes until repatriation

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Basic Findings

• Affiliate profitability is negatively associated with the

country’s tax rateHarris (1993); Klassen et al (1993); Jacob (1996)

Klausen and LaPlante (2012)

• Intra-firm trade (sales, pricing etc) is consistent with

firms shifting income to low tax jurisdictions.Clausing (2000)

• US MNCs shift income into the US when foreign tax

rates exceed US domestic rates

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Future Directions for Transfer Pricing Research

• Role of the territorial v. worldwide regimes on transfer pricing incentives

• Markle (2015) - DATA: Orbis BvD

• Is income shifting bad for the U.S.?– Incentives to avoid withholding taxes (Treaty Positions)– Foreign Tax Credit generators/splitting– Check the Box

• Role of indirect taxes?– Property taxes– VAT

• Limits to transfer pricing?– Financial Constraints – Dyreng Markle (2014)– Capital structure effects– Internal frictions

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