Presentation to the International Tax Policy Forum October 3, 2008 Does the Domicile of a Multinational Affect its Worldwide Corporate Income Tax Liability? Kevin Markle and Douglas A. Shackelford University of North Carolina at Chapel Hill Presentation to the International Tax Policy Forum October 3, 2008

Presidential debate, September 26, 2008 McCAIN: “Right now, American business pays the second-highest business taxes in the world, 35 percent. Ireland pays 11 percent. “Now, if you're a business person, and you can locate any place in the world, then, obviously, if you go to the country where it's 11 percent tax versus 35 percent, you're going to be able to create jobs, increase your business, make more investment, et cetera. “I want to cut that business tax. I want to cut it so that businesses will remain in -- in the United States of America and create jobs.”

Presidential debate, September 26, 2008 OBAMA: “Now, John mentioned the fact that business taxes on paper are high in this country, and he's absolutely right. Here's the problem: There are so many loopholes that have been written into the tax code, oftentimes with support of Senator McCain, that we actually see our businesses pay effectively one of the lowest tax rates in the world.”

Research questions Are the average effective tax rates for domestics and multinationals within a country different? Are the average effective tax rates of multinationals different across countries?

Summary of findings AETRs fell by ~20% over the 23 years (1984-2006). Country AETR order constant over time. Japan, Germany, and France have the highest AETRs Bermuda has the lowest AETR. Australia, Canada, and Singapore became relatively low- tax countries.

Summary of findings US and UK corporations have average AETRs. US and UK multinationals have much higher AETRs than their domestics. The US and UK multinational increments remain quite constant even as AETRs declined. US domestic AETRs vary much more across industries than do US multinational AETRs.

Empirical methods Estimate the following regression β0 = domestic AETR β1 = incremental multinational AETR β0 + β1 = total multinational AETR

Empirical methods Tax measures Current tax expense Total tax expense Income measures NIBT Adjusted net income = NIBT plus Revenue

Data Compustat Osiris Tax Total Current ADJNI = NIBT + Depreciation R&D Pension Multinational if Foreign tax expense or foreign profits (US-Canada) Foreign sub Determination made Annually In 2006

Multinational AETR Domestic AETR

Germany US UK Bermuda