@article {960, title = {Transfer pricing: Strategies, practices and tax minimization}, journal = {Contemporary Accounting Research}, year = {Accepted}, abstract = {

Using a survey of tax executives from multinational corporations, we document that some firms set\ their transfer pricing strategy to minimize tax payments, but more firms focus on tax compliance.\ We estimate that a firm focusing on minimizing taxes has a GAAP effective tax rate that is 6.6 percentage\ points lower and generates about $43 million more in tax savings, on average, than a firm\ focusing on tax compliance. Available COMPUSTAT data on sample firms confirm our survey-based\ inferences. We also find that transfer pricing-related tax savings are greater when higher foreign\ income, tax haven use, and R\&D activities are combined with a tax minimization strategy.\ Finally, compliance-focused firms report lower FIN 48 tax reserves than tax-minimizing firms,\ consistent with the former group using less uncertain transfer pricing arrangements. Collectively,\ our study provides direct evidence that multinational firms have differing internal priorities for\ transfer pricing, and that these differences are strongly related to the taxes reported by these firms.

}, author = {Kenneth Klassen and Petro Lisowsky and Devan Mescall} } @article {959, title = {Unprofitable affiliates and income shifting behavior}, journal = {The Accounting Review}, year = {Accepted}, abstract = {

Income shifting from high-tax to low-tax jurisdictions is considered a primary method of\ reducing worldwide tax burdens of multinational firms. Current losses also affect incomeshifting\ incentives. We extend prior approaches by explicitly considering unprofitable affiliates\ and test whether the association between losses and tax incentives for unprofitable affiliates\ deviates from the negative association observed in profitable affiliates. Results suggest that\ multinational firms alter the distribution of reported profits to take advantage of losses. Our point\ estimate for profitable affiliates implies that an increase of one standard deviation in the tax\ incentive, C, of an affiliate with average return on assets of 13.3 is associated with a lower return\ on assets of 0.5 percentage points. The same change in tax incentive of an unprofitable affiliate is\ associated with an increase in its return on assets of approximately 0.7 percentage points,\ holding assets, labor, productivity and other factors constant. We further document a larger\ responsiveness to tax incentives between profitable and unprofitable affiliates in high-tax\ jurisdictions, consistent with predictions.

}, author = {Lisa De_Simone and Jeri Seidman and Kenneth Klassen} } @article {965, title = {The role of auditors, non-auditors, and internal tax departments in corporate tax aggressiveness}, journal = {The Accounting Review}, volume = {91}, year = {2016}, pages = {179-205}, abstract = {

Using confidential data from the Internal Revenue Service on who signs a corporation{\textquoteright}s tax return, we\ investigate whether the party primarily responsible for the tax compliance function of the firm{\textemdash}the auditor, an\ external non-auditor, or the internal tax department{\textemdash}is related to the corporation{\textquoteright}s tax aggressiveness. We report\ three key findings: (1) firms preparing their own tax returns or hiring a non-auditor claim more aggressive tax\ positions than firms using their auditor as the tax preparer; (2) auditor-provided tax services are related to tax\ aggressiveness even after considering tax preparer identity, which supports and extends prior research using tax\ fees as a proxy for tax planning; and (3) Big 4 tax preparers, in particular, are linked to less tax aggressiveness when\ they are the auditor than when they are not the auditor. Our findings help policymakers and researchers better\ understand an important feature of tax compliance intermediaries; particularly, how the dual role via audits is related\ to observable corporate tax outcomes.

}, author = {Kenneth Klassen and Petro Lisowsky and Devan Mescall} } @article {963, title = {Targets\’ tax shelter participation and takeover premiums}, journal = {Contemporary Accounting Research}, volume = {34}, year = {2016}, pages = {1440-1472}, abstract = {

This paper examines the effect of targets{\textquoteright} participation in tax shelters on takeover premiums\ in mergers and acquisitions. Using a novel data set in which targets disclose that they have\ not participated in tax shelters, we find that targets that make this statement in their merger\ filings are associated with 4.6 percent higher takeover premiums, on average. These findings\ suggest that acquirers are concerned about the potential future liabilities when targets have\ engaged in tax sheltering. Consistent with this interpretation, the results also indicate that the\ positive association between targets{\textquoteright} nonsheltering disclosure and acquisition premiums is\ stronger for less tax-aggressive acquirers. This paper demonstrates the importance of targets{\textquoteright}\ aggressive tax positions in the determination of premiums offered to targets{\textquoteright} shareholders.

}, author = {Travis Chow and Kenneth Klassen and Yanju Liu} } @article {968, title = {A model of multinational income shifting and an application to tax planning with e-commerce}, journal = {Journal of the American Taxation Association}, volume = {36}, year = {2014}, pages = {27-53}, abstract = {

This manuscript develops an investment model that incorporates the joint\ consideration of income shifting by multinational parents to or from a foreign subsidiary\ and the decision to repatriate or reinvest foreign earnings. The model demonstrates\ that, while there is always an incentive to shift income into the U.S. from high-foreigntax-\ rate subsidiaries, income shifting out of the U.S. to low-tax-rate countries occurs\ only under certain conditions. The model explicitly shows how the firms{\textquoteright} required rate\ of return for foreign investments affects both repatriation and income shifting decisions.\ We show how the model can be used to refine extant research. We then apply it to a\ novel setting{\textemdash}using e-commerce for tax planning. We find firms in manufacturing\ industries with high levels of e-commerce have economically significant lower cash\ effective tax rates. This effect is magnified for firms that are less likely to have taxable\ repatriations.

}, author = {Kenneth Klassen and Stacie Laplante and Carla Carnaghan} } @article {976, title = {Complacency and giving up across repeated tournaments: Evidence from the field}, journal = {Journal of Management Accounting Research}, volume = {25}, year = {2013}, pages = {143-168}, abstract = {

Tournament incentive schemes involve individuals competing against each other for a single or limited number of rewards (e.g., promotion, bonus, pay raise). Although research shows tournament schemes can have positive effects on performance, there is also evidence of dysfunctional intra-tournament behavior by top performers (complacency) and weak performers (giving up). However, few studies have examined behavior in organizational settings, not uncommon in practice, where tournaments are conducted on a repeated basis. We predict that complacency and giving up will generalize to settings where individuals repeatedly compete in successive short-duration tournaments. We test our predictions using archival data from a reservation center of a major hotel chain that employs repeated four-week tournaments where performance does not carryover from one competition to the next. Results show top performers quickly become complacent in response to success in early tournaments. The lowest-performing losers in early tournaments eventually appear to give up, but additional analysis indicates they only do so after unsuccessfully changing task strategy. Our results contribute to a better understanding of individual behavior in settings where individuals\ repeatedly compete against largely the same group of employees. Our evidence also suggests that tournaments are less\ effective at sustaining the motivation of the most capable performers and other approaches may be necessary.

}, author = {Leslie Berger and Kenneth Klassen and Theresa Libby and Alan Webb} } @article {978, title = {Are U.S. multinational corporations becoming more aggressive income shifters?}, journal = {Journal of Accounting Research}, volume = {50}, year = {2012}, pages = {1245{\textendash}1285}, abstract = {

This paper examines income shifting of U.S. multinational companies over\ the past two decades. Domestic and foreign policy makers are increasingly\ concerned with the effect of income shifting on dwindling tax revenues, however,\ extant research on income shifting by U.S. multinational enterprises is\ mixed. We address the disconnect between the academic literature and the\ policy maker{\textquoteright}s perceptions by examining the extent of multijurisdictional income\ shifting by U.S. multinational companies. We directly address conflicting\ results in extant literature and show that using either multiperiod proxies\ or instrumental variables overcomes weaknesses of annual proxies in this\ setting. Our tests show that U.S. companies have become more active at shifting\ income out of the United States as the regulatory costs of shifting have\ changed. Holding tax rate differences between U.S. and foreign jurisdictions\ constant, our empirical estimates suggest that our sample of 380 corporations\ with low average foreign tax rates collectively shifts approximately $10 billion\ of additional income out of the United States annually during 2005{\textendash}2009 relative\ to 1998{\textendash}2002 due to varying regulatory costs of shifting.

}, author = {Kenneth Klassen and Stacie Laplante} } @article {980, title = {The effect of foreign reinvestment and financial reporting incentives on cross-jurisdictional income shifting}, journal = {Contemporary Accounting Research}, volume = {29}, year = {2012}, pages = {928{\textendash}955}, abstract = {

This paper investigates the influence of foreign reinvestment-related and financial reporting incentives on income shifting of U.S. multinational companies.\  While foreign and domestic policymakers are concerned with the effect of income shifting on dwindling tax revenues, to date no research has focused on the character of firms that are more aggressive income shifters. We provide insights on the role of cross-sectional variation in foreign reinvestment-related incentives and financial reporting incentives in income shifting; insights that are useful to policymakers, regulators, researchers and stakeholders. Using a comprehensive approach to estimate income shifting, we find evidence consistent with our argument that foreign reinvestment-related incentives affect a firm{\textquoteright}s propensity to shift income when domestic tax rates exceed foreign tax rates, but not when foreign tax rates exceed domestic tax rates.\  We also find that firms with low foreign tax rates and incentives to manage income on their financial statements more actively shift income out of the U.S. than other firms.\  Finally, we estimate that firms with high reinvestment-related (financial reporting) incentives shift approximately $42 million ($43 million) of additional income per firm per year out of the U.S. relative to firms with low reinvestment-related (financial reporting) incentives.

}, author = {Kenneth Klassen and Stacie Laplante} } @article {981, title = {Investor taxes and equity pricing: Using income trusts in a cross-sectional analysis}, journal = {Canadian Tax Journal}, volume = {60}, year = {2012}, pages = {1-34}, abstract = {

Adapting a valuation model, the authors create an after-tax Feltham-Ohlson model to gain deeper insights into the effect of both investor- and corporate-level taxes on equity valuation. We apply this model to the unique Canadian setting of income trusts to explore the valuation effect of taxes and the tax characteristics of investors. Canadian income trusts are publicly traded flowthrough entities whose use expanded beyond the\ traditional real estate sector. Their unique tax status and broad usage across industries provides an opportunity to investigate the role of investor taxes on common shares in a cross-sectional analysis. Empirical testing shows that the value of earnings is lower for corporations than for a set of matched businesses operating as an income trust, consistent with the average investor in an income trust having a tax rate significantly below the top marginal individual rate.

}, author = {Kenneth Klassen and Devan Mescall} }