A Model of Multinational Income Shifting and an Application to Tax Planning with E-Commerce

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-foreign-tax-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' 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—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.

Keywords:  tax planning, e-commerce, income shifting, foreign direct investment, multinational

Article Citation:

Kenneth J. Klassen, Stacie K. Laplante, and Carla Carnaghan (2014) A Model of Multinational Income Shifting and an Application to Tax Planning with E-Commerce. The Journal of the American Taxation Association: Fall 2014, Vol. 36, No. 2, pp. 27-53.