Thomas Matthews

Abstract

Does home-country taxation of foreign earnings affect cross-jurisdictional income shifting?

In this thesis, I investigate whether differences in the tax treatment of foreign earnings affect the extent to which multinational firms shift reported income between their domestic and foreign segments. I compare the inferred income-shifting patterns of multinationals domiciled in countries that tax firms' worldwide incomes with those of multinationals domiciled in territorial-tax countries, where foreign earnings are basically exempt from home-country taxation. I predict that both types of firms will shift income into their home countries when their foreign tax rates are greater than their domestic tax rates. However, I predict that firms domiciled in worldwide-tax countries will shift less income abroad than will firms domiciled in territorial-tax countries when the firms' foreign tax rates are lower than their domestic tax rates.

While the evidence indicates that multinationals shift high-tax foreign income home, it does not support the hypothesis that firms subject to worldwide taxation shift less domestic income to low-tax foreign affiliates than do territorial-tax firms. This contradicts the conjecture of prior research that the weaker response of U.S. multinationals to low foreign tax rates is a consequence of the worldwide tax regime. An alternative explanation may be that home-country tax authorities are effective at preventing substantial income shifting out of these countries. Further analysis detects some evidence of income shifting out of home countries, but only for R&D-intensive firms, which are firms thought to possess a greater ability to shift income through transfers of intellectual property.