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The effect of financial constraints on income shifting by U.S. multinationals

Publication ,  Journal Article
Dyreng, SD; Markle, KS
Published in: Accounting Review
November 1, 2016

When a U.S. multinational corporation shifts income from the U.S. to foreign jurisdictions, it incurs costs and reaps benefits. The benefits may be reduced if the shifted income must be returned to the U.S. as a dividend in the short term and face the same U.S. tax it would have if the income had not been shifted. Firms, then, have incentive to defer repatriation of earnings and to fund domestic cash needs with external financing. The cost of external financing, however, is increasing in financial constraints, leading to the prediction that constrained firms will be unable to defer repatriation and, therefore, will reap no benefits from shifting. Using a new methodology for measuring income shifting, we find, consistent with predictions, that financially constrained firms shift less income from the U.S. to foreign countries than their unconstrained peers. We estimate that financially constrained firms shift out 20 percent less of pre-shifted income than unconstrained firms. Translating this percentage to dollar values, the mean (median) constrained firm shifts $16 million ($7 million) out of the U.S. each year, while the mean (median) unconstrained firm shifts $321 million ($134 million) out of the U.S. each year. Assuming that the inability to defer repatriation is the primary constraint preventing the U.S. worldwide tax system from being a de facto territorial system, we use our findings to estimate that changing to a pure territorial tax system would increase outbound income shifting by U.S. multinationals by 8 percent.

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Published In

Accounting Review

DOI

ISSN

0001-4826

Publication Date

November 1, 2016

Volume

91

Issue

6

Start / End Page

1601 / 1627

Related Subject Headings

  • Accounting
  • 3502 Banking, finance and investment
  • 3501 Accounting, auditing and accountability
  • 1501 Accounting, Auditing and Accountability
 

Citation

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Dyreng, S. D., & Markle, K. S. (2016). The effect of financial constraints on income shifting by U.S. multinationals. Accounting Review, 91(6), 1601–1627. https://doi.org/10.2308/accr-51420
Dyreng, S. D., and K. S. Markle. “The effect of financial constraints on income shifting by U.S. multinationals.” Accounting Review 91, no. 6 (November 1, 2016): 1601–27. https://doi.org/10.2308/accr-51420.
Dyreng SD, Markle KS. The effect of financial constraints on income shifting by U.S. multinationals. Accounting Review. 2016 Nov 1;91(6):1601–27.
Dyreng, S. D., and K. S. Markle. “The effect of financial constraints on income shifting by U.S. multinationals.” Accounting Review, vol. 91, no. 6, Nov. 2016, pp. 1601–27. Scopus, doi:10.2308/accr-51420.
Dyreng SD, Markle KS. The effect of financial constraints on income shifting by U.S. multinationals. Accounting Review. 2016 Nov 1;91(6):1601–1627.

Published In

Accounting Review

DOI

ISSN

0001-4826

Publication Date

November 1, 2016

Volume

91

Issue

6

Start / End Page

1601 / 1627

Related Subject Headings

  • Accounting
  • 3502 Banking, finance and investment
  • 3501 Accounting, auditing and accountability
  • 1501 Accounting, Auditing and Accountability