ABSTRACT
In this thesis, I investigate whether differences in the tax treatment of
foreign earnings affect the extent to which multinational firms shift reported
income between their domestic and foreign segments. I compare the inferred
income-shifting patterns of multinationals domiciled in countries that tax
firms' worldwide incomes with those of multinationals domiciled in territorial-tax
countries, where foreign earnings are basically exempt from home-country taxation.
I predict that both types of firms will shift income into their home countries
when their foreign tax rates are greater than their domestic tax rates. However,
I predict that firms domiciled in worldwide-tax countries will shift less income
abroad than will firms domiciled in territorial-tax countries when the firms'
foreign tax rates are lower than their domestic tax rates.
While the evidence indicates that multinationals shift high-tax foreign income
home, it does not support the hypothesis that firms subject to worldwide taxation
shift less domestic income to low-tax foreign affiliates than do territorial-tax
firms. This contradicts the conjecture of prior research that the weaker response
of U.S. multinationals to low foreign tax rates is a consequence of the worldwide
tax regime. An alternative explanation may be that home-country tax authorities
are effective at preventing substantial income shifting out of these countries.
Further analysis detects some evidence of income shifting out of home countries,
but only for R&D-intensive firms, which are firms thought to possess a
greater ability to shift income through transfers of intellectual property.