How do International Tax Systems Influence Multinational Corporations’ Income-shifting and Dividend Strategies?

This study tests the effects of international tax systems on multinational corporations’ income-shifting and dividend strategies. The empirical results of the study yield three main findings. First, there is no substantial difference in the level of income shifting between foreign affiliates subject to the territorial system (territorial affiliates) and those subject to the worldwide system (worldwide affiliates). The high tax incentives of U.S. multinationals for income shifting are considered a potential factor in this result. Second, compared to worldwide affiliates, territorial affiliates remit more earnings to their parents as dividends because their dividends are exempt from repatriation taxes. Specifically, territorial affiliates pay, on average, 29.1 percent more of their earnings as dividends compared to worldwide affiliates. Lastly, territorial affiliates pay more dividends as more income is shifted in, whereas worldwide affiliate pay less dividends. The last finding implies that territorial affiliates attempt to avoid home-country taxes by shifting income to lower-tax-rate affiliates and repatriating the income to their parents. By contrast, worldwide affiliates shift income to lower-tax-rate affiliates and hold the income overseas to defer home-country taxation. The results are generally supported by a series of supplementary tests.