Presentation Transcript

1. International Tax Research

   Stacie Laplante ATA Doctoral Consortium February 21, 2013
2. Outline Motivation – why should I consider doing research in this area? Research - what has been studied? Framework Investment decision Profit decision Opportunities (aka challenges) – what can I do to be successful in this area? Conclusion
3. Motivation - Quiz What do the following individuals have in common? Rich and Famous? Rich? Famous?
4. Motivation - Quiz What do the following individuals have in common? Tax Planners?
5. Motivation - Quiz Eduardo Saverin Facebook founder Gave up US citizenship before IPO in 2011 WHY? Singapore: 20% tax on earnings 0% tax on capital gains Versus? In US (uncertainty) Non-tax cost – can he come back to the U.S. to visit his family? TAX PLANNER
6. Motivation - Quiz Gerard Depardieu French actor Gave up French citizenship WHY? Russia: 13% flat tax on earnings Versus 41% to 75% in France Non-tax cost – living in Russia vs. living in France TAX PLANNER
7. Motivation - Quiz Terry Shevlin Academic extraordinaire Washington to California – WHY? WA: No income tax CA: 13.3% rate on “top earners” Non-tax benefit – SUNSHINE! Point – taxes (often) matter and people engage in tax planning using multiple jurisdictions, trading off tax and non-tax costs. Companies do it to. TAX PLANNER?
8. Motivation Why should I do research in this area? Researchers care – setting enhances power Variation in tax rates, base, enforcement, etc. Data keeps improving Accountants understand complex rules
9. Accountants understand complex rules Understand complex tax rules & how they are utilized by companies in crafting actual investing and profit allocation decisions Understand important non-tax cost = financial reporting implications
10. Motivation Why should I do research in this area? Researchers care – setting enhances power Variation in tax rates, base, enforcement, etc. Data keeps improving Accountants understand complex rules Stakeholders care – especially now! Investors care – maximize after-tax returns MNC’s important to the economy Policymakers care – collect taxes Other stakeholders care – good corporate citizens
11. MNC’s important to the economy US MNCs account for $2.5 trillion or 24.9% of 2009 private sector output 31.3% of all capital investment purchases 48% of all US exports 19.1% of all private sector payroll US MNCs pay workers well Avg MNC worker $62,784 vs. $50,621 in private sector (24% more)
12. Motivation Why should I do research in this area? Researchers care – setting enhances power Variation in tax rates, base, enforcement, etc. Data keeps improving Accountants understand complex rules Stakeholders care – especially now! Investors care – maximize after-tax returns MNC’s important to the economy Policymakers care – collect taxes Other stakeholders care – good corporate citizens
13. Motivation – Policymakers care “There is a growing perception that governments lose substantial corporate tax revenue because of planning aimed at shifting profits in ways that erode the taxable base to locations where they are subject to a more favourable tax treatment.” OECD Addressing Base Erosion and Profit ShiftingFeb. 2013 Some small jurisdictions receive disproportionately large FDI Rules do not reflect economic integration across borders, the value of intellectual property, or new communication technologies Tax rule gaps between countries allow MNCs to reduce taxes MNCs more aggressive in last decade
14. Motivation Why should I do research in this area? Researchers care – setting enhances power Variation in tax rates, base, enforcement, etc. Data keeps improving Accountants understand complex rules Stakeholders care – especially now! Investors care – maximize after-tax returns MNC’s important to the economy Policymakers care – collect taxes Other stakeholders care – good corporate citizens
15. Motivation – Other stakeholders care “British Lawmakers Accuse Multinationals of ‘Immorally’ Avoiding Taxes” New York Times 3 Dec 2012 “Starbucks Offers to Pay More British Tax Than Required” New York Times 6 Dec 2012 “Starbucks row over tax and staff contracts could squeeze sales by 24%” Guardian 7 Dec 2012 “UK Uncut protesters shut down Starbucks shops – US coffee chain targeted in row over ‘rubbish’ corporation tax payments” Guardian 8 Dec 2012 “Starbucks threatens Cameron after “unfair” tax attacks” The Telegraph 26 Jan 2013 “Forget Starbucks – what UK companies are doing to avoid tax is far worse” Guardian 10 Feb 2013
16. Motivation Researchers care – setting enhances power Variation in tax rates, base, enforcement, etc. Accountants understand complex rules Data keeps improving Stakeholders care – especially now! MNC’s important to the economy Policymakers care – collect taxes Investor’s care – maximize after-tax-returns Other stakeholders care – good corporate citizens  Relevant & interesting area  Editors & reviewers like relevant & interesting research!
17. Research - Framework (see Devereux & Maffini 2007) Choices firms make in an international context: 1st: Produce at home & export, or produce abroad? 2nd: If abroad, where to locate production? 3rd: Conditional on location, must choose level of investment? 4th: Where to locate profits? Repatriate? 1, 2 & 3 – investment decisions 4 – profit decisions
18. Research Caveat – providing brief overview KEY – note the progression Initial studies documenting investing and profit decisions Recent studies – more powerful data, better theory
19. Where to locate investment? – Early work Do taxes affect decision? Host country taxes affect location decision Estimate 1% in tax rates FDI by 3.3% (de Mooij and Ederveen 2003) Data issues (see Devereux & Maffini 2007 for detailed summary) Aggregate FDI flows  taxes consistently have significant impact Aggregate affiliate data within specific countries  results mixed Firm specific data  able to review specific decisions and show taxes matter (e.g., Kemsley 1998 examines decision to export or produce abroad) Tax considerations important when non-tax costs are low (Wilson 1993) Interviews with key employees in nine companies
20. Where to locate investment? – Recent work Does financial accounting affect decision? Real decisions that increase flexibility in book and/or tax reporting are valuable (Shackelford, Slemrod, Sallee 2011) Financial accounting expense deferral is as important as cash tax deferral when deciding where to locate (Graham, Hanlon and Shevlin 2011) 64 question survey sent to 2,806 firms (N = 595) 31% rate APB 23 expense deferral important in location decision % higher if publicly traded, have foreign assets, and have high R&D spending Also examine repatriation decision
21. Where to locate investment? – Recent work Foreign ownership varies across firms (Lewellen and Robinson 2013) Firms choose their ownership structures in response to legal and tax rules imposed by host countries Taxes only one of several considerations Multiple sources of data BEA data: Includes financial data on domestic & foreign ops GDP from Worldbank Investment treaty data from UNCTAD & Worldbank Trade agreement data from NSF-Kellogg Institute Tax data from Comtax, Worldscope, Deloitte, KPMG and E&Y
22. Where to locate profits? Income Shifting (e.g., location of debt/intangibles, transfer pricing, entity selection) Early papers document shifting patterns of firms moving income from high to low tax pocket 1980s in response to tax rate changes (e.g., Klassen, Lang and Wolfson 1993; Harris 1993) 1988-1992 U.S. MNCs shift into, but not out of U.S. (Collins, Kemsley and Lang 1998 ) In general, show shifting is a viable tax planning technique but some results puzzling
23. Where to locate profits? Income Shifting: Modifications Klassen and Laplante (2012) – revisit/extend CKL Measurement error in proxy for incentive to shift income Incentive = AvgFOR – StatutoryUS Income shifting = multi-period exercise Replicate CKL, then modify using multi-period proxies & I.V. Estimate income shifting by regressing foreign pre-tax RoS on Worldwide pre-tax RoS + tax measures Show income shifting both into and out of U.S. Extend analysis to show income shifting changes Changes in tax rates, transfer pricing rules/enforcement, Estimate $10 billion more shifted out of US during 2005-2009 annually relative to 1988 – 1992 for our sample of 380 companies
24. Where to locate profits? Income Shifting:Modifications - specific techniques Location of debt mechanism for tax-motivated income shifting 1987-1997 US MNC bond offerings (Newberry & Dhaliwal 2001) 1987 – 1996 US income tax data on Foreign Controlled Corporations (Mills and Newberry 2004) Transfer pricing - U.S. exporters set smaller prices for related parties (Bernard, Jensen, and Schott 2006) Data – includes every U.S. export transaction from 1993- 2000 Average arm’s length price 43% higher than related party price (8% for commodities; 66.7% for differentiated goods) Transfer pricing – differences in practices and strategies across firms (Klassen, Lisowsky and Mescall 2013) Survey evidence – 219 MNCs Saturday at 3:30
25. Where to locate profits? Permanently Reinvested Earnings Financial reporting incentives – deferral of tax expense important to firms e.g., Krull (2004), Graham, Hanlon and Shevlin (2011), Blouin, Krull and Robinson (2012) American Jobs Creation Act (2004) – temporary tax holiday Valuation effects (e.g., De Waegenaere and Sansing 2008; Oler, Shevlin and Wilson 2007) Characteristics of firms that repatriate and use of funds (Blouin and Krull 2009) Location of PRE (Blouin, Krull and Robinson 2012) Effect of PRE held as cash on foreign acquisitions (Edwards, Kravet and Wilson 2012)
26. Where to locate investment/profits? International operations & tax planning Effect of multinational operations on worldwide effective tax rates Rego (2003) – US MNCs scale of operations related to ETRs Markle and Shackelford (2009) – Domicile of parent related to ww ETRs Effect of the location of US MNC’s foreign operations on worldwide, federal and foreign tax rates (Dyreng and Lindsey 2009)
27. Research Summary Take away from research review Early studies document taxes matter for investment and profit location Studies generally incorporate SWEMS framework Recent studies refine theory and data Proliferation of data sources Theory advancement more measured Pretty convincing evidence that financial accounting is important
28. Opportunities (aka Challenges) What can I do to be successful in this area? Knowledge – continue exploiting strengths Tax & accounting rules in multiple countries Understanding business environment to generate interesting questions READ: e.g., WSJ, Economist Research in public economics & finance Creative use of new & existing data sources
29. Opportunities – Suggested Readings Klassen and Laplante (wp 2013) Example of theoretical advancement Incorporates income shifting into models of investment Optimal shifting relates to the interplay of costs and tax rate differential Suggests hypotheses refinement for recent income shifting and PRE studies Example of new data on e-commerce Markle (wp 2012) - Examines Income shifting in territorial vs. worldwide systems Example of data advancement (Orbis database)
30. Opportunities – Suggested Readings Graham, Hanlon & Shevlin (JAR 2011) Explicitly incorporates predictions from Shackelford, et al. (2011) regarding financial accounting Looks separately at investing & profit decision Example of data advancement Any feedback for KL (2013) or Markle (2012) greatly appreciated!
31. Conclusion Motivation Interesting and important area of research Research – lots of it, but room for more! Investment & profit decision: Taxes matter, but nontax considerations like financial accounting matter too Advances in theory and data helping us move forward Opportunities Accountants bring valuable skills to the table – exploit! Big world – learn about what businesses are doing Editors like to publish interesting research!
32. Thank you!