@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} }