Income Shifting under Losses

Arnt O. Hopland (), Petro Lisowsky (), Mohammed Mardan and Dirk Schindler
Additional contact information
Arnt O. Hopland: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Petro Lisowsky: College of Business, University of Illinois at Urbana-Champaign, Postal: University of Illinois at Urbana-Champaign, College of Business, 196 Wohlers Hall, 1206 South Sixth Street, Champaign, IL, 61820, USA, https://business.illinois.edu/profile/petro-lisowsky/

No 2015/21, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: This paper examines the flexibility of multinational firms to use income-shifting strategies within a tax year to react to operating losses. We develop a theoretical model that considers how affiliate losses can be adjusted ex post (i.e., after financial outcomes are revealed) or ex ante (i.e., before financial outcomes are revealed) by using transfer prices and internal debt. Our model predicts that under ex-post income shifting, loss affiliates have lower transfer prices and internal leverage than profitable affiliates, whereas under ex-ante income shifting, affiliates feature the same transfer prices and internal capital structure, regardless of making losses. Using data on direct transfer payments and internal debt of Norwegian affiliates, we find empirical evidence that, under losses, transfer pricing provides flexibility to adjust income shifting ex post, while we do not find evidence for flexibility in the use of internal debt to shift income ex post. Our study extends prior literature on income shifting that focuses largely on profitable firms and does not consider transfer pricing and internal debt shifting concurrently.

Keywords: Income shifting; losses; debt shifting; transfer prices (search for similar items in EconPapers)
JEL-codes: F23 H25 H87 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015-09-16
References: Add references at CitEc
Citations: View citations in EconPapers (22)

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Related works:
Working Paper: Income Shifting under Losses (2015)
Working Paper: Income Shifting under Losses (2014)
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