The Impact of Headquarter and Subsidiary Locations on Multinationals’ Effective Tax Rates Kevin Markle, University of Waterloo Douglas A. Shackelford, University of North Carolina International Tax Policy Forum February 11, 2014

Two Competing Perspectives about US International Tax Policy #1 “World is going to hell in a hand basket” because U.S.-based multinationals are overtaxed. As proof: Statutory tax rate New companies do not incorporate in the U.S. U.S. tax law results in inefficient build-up of cash abroad Foreign companies have a tax advantage in the market for corporate control Other problems are worldwide tax system, limits on the deductibility of some expenses, CFC rules, aggressive IRS, etc.

Two Competing Perspectives about US International Tax Policy #2 “World is going to hell in a hand basket” because multinationals can easily erase any disadvantages from operating in high-tax domiciles. As proof: Dutch-Irish Sandwiches “Stateless” income Congressional and Parliamentary hearings on Apple, Google, Starbucks, and Amazon, etc. OECD reports Lots of research/business press documenting transfer pricing, hybrid entities, profit stripping, timely repatriation, etc.

Research Questions Does the Location of the Multinational’s Headquarters affect its Global Taxes? Over Time Across Industries How Does Expanding into a New Country affect a Multinational’s Global Taxes? Does the Type of Subsidiary (Operating vs Holding Company) Affect the Multinational’s Global Taxes?

What Do We Do? Take the effective tax rates (ETRs) from 2006- 2011 financial statements for 9,022 multinationals headquartered in 87 countries with 224,090 foreign subsidiaries Control for industry, year and size

Primary Regression Model  

Relative ETRs by Parent Country, 2006-2011 As discussed in the email, I want the Country coefficients from Table 2 in this graph. Since we only have multinationals, there will only be one column per country.

Multinational Tax rates over Time I want the Table 4 results in lines for Canada, China, Germany, Japan, Singapore, UK, US and Tax Havens

Cross-Industry ETR Variation  

Industry effects I’d like an Industry slide that has two columns for every industry, except Transportation. One column has the Industry main effect from the top row of Table 5. The other column has the US effect from the US line in Table 5. So, for Construction, it would be -3.2 and 0.8.

ETR Impact of Entering a Country  

ETR effect of U.S. firms entering specific countries I need a table that shows results from Table 6 for US companies. The countries will be Bermuda, Cayman Islands, Hong Kong, Ireland, Luxembourg, Netherlands, Singapore, Switzerland, Taiwan, and Other Tax Havens. For example, Bermuda will show a coefficient of 0.3.

Effect on ETR of new Operating vs. Holding subs I want a table that compares results from Table 7, Panels A and B for US companies. It will have 2 columns for the following countries: Belgium, Ireland, Luxembourg, Netherlands, Switzerland and Other Tax Havens. For example, for Belgium it will have -0.2 from Panel A and 1.0 from Panel B.

Conclusions Despite enormous investments in tax planning, headquarter locations continue to matter. ETRs were stable from 2006-2011. US taxes finance more heavily and information more lightly. When a multinational puts a subsidiary in a tax haven, its ETR immediately declines slightly. Operating and holding subsidiary have different ETR effects.

Caveats Book numbers, not tax returns Identification is difficult in cross-country studies. Better with fixed effects in subsidiary tests.