Income shifting and corporate taxation: The role of cross-border intrafirm transfers

Purpose The purpose of this paper is to examine the cross-sectional relation between the value of cross-border intrafirm transfers (CITs) and three dependent variables: return on investment (ROI), the US effective tax rate (ETRUS), and the global effective tax rate (ETRGL) to assess the existence or nonexistence of cross-jurisdictional income shifting. Design/methodology/approach Regression analysis is used to test the relationship between CIT and accounting performance and effective tax rates. Findings The results indicate that ROI and ETRUS increase whereas ETRGL decreases with the extent of CITs after we control for variables that impact earnings and taxes (e.g. size, industry classification, internationalization, tax shelter, and growth). This suggests that firms earn income, on average, in jurisdictions with tax rates greater than the USA, such that diverting income from overseas to the USA is a tax-saving action. The tax results are consistent with Jacob and Mills and Newberry\u27s findings that firms shifted income into the USA. The results also reveal that companies that engage in CITs are those that are large, relatively more profitable, and pay more US taxes. Research limitations/implications This study does not differentiate between transfer pricing schemes for tax minimization reasons from those done for earnings management purposes, which should be addressed by future research. Practical implications Results have public policy implications as an understanding of how CITs affect accounting performance and taxes is important for the craft of tax policy and transfer price regulation. Originality/value This study furthers our understanding of the impact of CITs on earnings and taxes, an important component of accounting research which has not been properly addressed by prior studies. © 2008, Emerald Group Publishing Limite

Income shifting and corporate taxation: the role of cross-border intrafirm transfers

Purpose – The purpose of this paper is to examine the cross-sectional relation between the value of cross-border intrafirm transfers (CITs) and three dependent variables: return on investment (ROI), the US effective tax rate (ETRUS), and the global effective tax rate (ETRGL) to assess the existence or nonexistence of cross-jurisdictional income shifting. Design/methodology/approach – Regression analysis is used to test the relationship between CIT and accounting performance and effective tax rates. Findings – The results indicate that ROI and ETRUS increase whereas ETRGL decreases with the extent of CITs after we control for variables that impact earnings and taxes (e.g. size, industry classification, internationalization, tax shelter, and growth). This suggests that firms earn income, on average, in jurisdictions with tax rates greater than the USA, such that diverting income from overseas to the USA is a tax-saving action. The tax results are consistent with Jacob and Mills and Newberry's findings that firms shifted income into the USA. The results also reveal that companies that engage in CITs are those that are large, relatively more profitable, and pay more US taxes. Research limitations/implications – This study does not differentiate between transfer pricing schemes for tax minimization reasons from those done for earnings management purposes, which should be addressed by future research. Practical implications – Results have public policy implications as an understanding of how CITs affect accounting performance and taxes is important for the craft of tax policy and transfer price regulation. Originality/value – This study furthers our understanding of the impact of CITs on earnings and taxes, an important component of accounting research which has not been properly addressed by prior studies.Earnings, Income, Return on investment, Tax planning, Taxes, United States of America

Improving corporate governance: The role of audit committee disclosures

An increasing number of earnings restatements along with many allegations of financial statement fraud committed by high profile companies (e.g. Enron, WorldCom, Global Crossing, Adelphia) has eroded the public confidence in corporate governance, the financial reporting process, and audit functions. The Sarbanes-Oxley Act of 2002 was an attempt to regain confidence and trust in corporate America and the accounting profession. The Act addresses corporate scandals and the perceived crisis in the auditing profession. Some of its provisions relate to the audit committee oversight function over corporate governance, financial reporting, internal control structure, internal audit functions, and external audit services. This study examines three types of audit committee disclosures: The annual report of the audit committee; reporting of the audit committee charter in the proxy statement at least once every three years; and disclosure in the proxy statement of whether the audit committee had fulfilled its responsibilities as specified in the charter. This study conducts a content analysis on audit committee disclosures of Fortune 100 companies. © 2003, MCB UP Limite

Corporate diversification, debt maturity structures and firm value: The role of geographic segment data

In this paper, we investigate whether foreign and domestic assets of US firms are financed with borrowed funds (e.g., with short-and long-term debt maturity structures). Our regression analysis documents a positive association between foreign assets and long-term debt, and a negative association between foreign assets and short-term debt. Estimation results show that 1% increase in FAS leads to, on average, a 39 percent increase in leverage, an economically important effect. We also document the opposite relations between long-term (negative relation) and short-term (positive relation) and domestic fixed assets. Further analysis suggests that a one percent increase in domestic assets corresponds to -20.13% decrease in long-term debt, while a 1% increase in domestic assets raises short-term debt by 16.66 percent, on average. We further find that foreign assets are incrementally, positively associated with Tobin\u27s q, indicating that foreign investment is a successful path to higher equity value, a result inconsistent with Denis et al (2002). In the partition sample, we find that variation in debt affects the pricing of foreign assets. We document that foreign assets of high debt-to-asset ratios are positively related to Tobin\u27s q, whereas the relation is less positive for medium debt-to-asset ratio firms and insignificant for low debt-to-asset ratios, implying that near-all equity firms do not trade at a discount

Multinationals' income shifting decisions, taxes and intra-company transfers: empirically testing market valuation

This paper tests whether intra-company transfers, viewed as distinct from ordinary sales transactions by policy makers and tax regulators, are associated with share price. When a multinational firm (MNC) transfers its intermediate goods between the parent company and its foreign subsidiary, its discretion over the price of goods can result in shifting income from a high tax to a low tax regime, reducing its overall tax liabilities. Intuitively, these tax savings represent an incremental value to the firm's shareholders. Thus, employing a variant of Ohlson's (1995) equity-valuation model, we test and document that firms that engage in intra-company transfers are rewarded with higher equity value. This is consistent with intra-company transaction choices significantly influencing firm value and opportunistic transfer pricing having market benefits. We also examine whether international transfers are connected to foreign pretax profit margins and foreign tax costs. Consistent with prior works (Klassen et al., 1993; Pak and Zdanowicz, 1994; Gramlich and Wheeler, 2003), we document that foreign pretax income and tax costs are positively related to intra-firm transfers, indicating that US multinationals shifted income away from the USA from 1998 to 2002.intra-company transfers; market values; foreign pre-tax income; tax costs; multinational corporations; MNCs; income shifting; decision making; taxes; sales transactions; policy makers; regulators; share prices; intermediate goods; parent companies; foreign subsidiaries; pricing; tax regimes; tax liabilities; tax savings; incremental values; shareholders; Ohlson's equity valuation model; equity value; firm value; transfer pricing; pre-tax profit margins; taxation; United States; USA; accounting; finance.