1. KNOWLEDGE FOR ACTION INTERNATIONAL TAX RESEARCH BEYOND APB 23: PART DEUX Jennifer Blouin 2015 ATA Doctoral Consortium

2. KNOWLEDGE FOR ACTION Broad Areas of Recent Work 1.Role of taxes on investment 2.Role of taxes on transfer pricing 3.Role of accounting for income taxes on foreign investment Blouin2

3. KNOWLEDGE FOR ACTION What is an accountant’s comparative advantage? 1.We understand the numbers 2.We understand that, if tax policy affects financial statements, there could be unintended consequences Blouin3

4. KNOWLEDGE FOR ACTION 1. Role of taxes on investment Do taxes affect the location and amount of investment? −Yes - Old work focuses on identifying the marginal source of foreign direct investment (retained earnings v. contributed capital) Hartman (1985), Boskin and Gale (1987), Sinn (1993, 1991), Hines and Rice (1994) etc. −Recent work examines overinvestment in foreign M&A Edwards et al. (2014); Hanlon et al. (2014) −Fruitful new work – U.S. investment by foreign firms: Does the U.S. system unfairly advantage foreign buyers in the U.S. M&A market? Bird et al. (2014) Blouin

5. KNOWLEDGE FOR ACTION Do taxes affect the repatriation of foreign earnings? −Although theory suggests otherwise, Hartman (1985), many studies find that taxes do matter in repatriation decisions Kopits (1972); Mutti (1981); Hines and Hubbard (1990); Goodspeed and Frisch (1989); Altshuler and Newlon (1993); Desai, Foley and Hines (2001, 2007) etc. −Why the disparity between Hartman and the empirical work? 1. Role of taxes on investment con’t Blouin

6. KNOWLEDGE FOR ACTION Altshuler, Newlon, and Randolph (1995) “None of the analyses mentioned on the prior slide has departed from the Hartman result: The level of the repatriation tax does not by itself affect the incentive to repatriate income rather than reinvest it”. Each of these papers have included settings where there is firm- created intertemporal variation in the repatriation taxes Transitory v. permanent repatriation tax rates The American Jobs Creation Act of 2004 −Blouin Krull (2009), Dharmapala et al. (2011), Faulkender Peterson (2012) Blouin

7. KNOWLEDGE FOR ACTION An Aside: Nine years later, we are still debating the efficacy of the AJCA… Brennan (2014) Where the Money Really Went: A New Understanding of the AJCA Tax Holiday, Northwestern Law School Working Paper Blouin

8. KNOWLEDGE FOR ACTION Why? Because the AJCA response matters in the multinational tax reform debate Blouin

9. KNOWLEDGE FOR ACTION Potential future work on repatriation activity Where did all of the AJCA funds go? What would happen if the worldwide tax system is repealed? What is the role of financial constraints on repatriation activity? Are U.S. firms really constrained by our system? Blouin9

10. KNOWLEDGE FOR ACTION 2. Role of taxes on transfer pricing Shifting out of high-tax foreign into lower-tax foreign/US creates permanent tax savings Shifting from US into low-tax foreign creates deferral of taxes until repatriation Blouin10

11. KNOWLEDGE FOR ACTION Basic Findings Affiliate profitability is negatively associated with the country’s tax rate Harris (1993); Klassen et al (1993); Jacob (1996) Klausen and LaPlante (2012) Intra-firm trade (sales, pricing etc) is consistent with firms shifting income to low tax jurisdictions. Clausing (2000) US MNCs shift income into the US when foreign tax rates exceed US domestic rates Blouin11

12. KNOWLEDGE FOR ACTION Future Directions for Transfer Pricing Research Role of the territorial v. worldwide regimes on transfer pricing incentives Markle (2015) - DATA: Orbis BvD Is income shifting bad for the U.S.? Incentives to avoid withholding taxes (Treaty Positions) Foreign Tax Credit generators/splitting Check the Box Role of indirect taxes? Property taxes VAT Limits to transfer pricing? Financial Constraints – Dyreng Markle (2014) Capital structure effects Internal frictions Blouin

13. KNOWLEDGE FOR ACTION Blouin13

14. KNOWLEDGE FOR ACTION