Through a Glass Darkly: What Can We Learn About a U.S. Multinational Corporation's International Operations From Its Financial Statement Disclosures?

Using a survey of tax executives from multinational corporations, we document that some firms set their transfer pricing strategy to minimize tax payments, but more firms focus on tax compliance. We estimate that a firm focusing on minimizing taxes has a GAAP effective tax rate that is 6.6 percentage points lower and generates about $43 million more in tax savings, on average, than a firm focusing on tax compliance. Available COMPUSTAT data on sample firms confirm our surveybased inferences. We also find that transfer pricing-related tax savings are greater when higher foreign income, tax haven use, and R&D activities are combined with a tax minimization strategy. Finally, compliance-focused firms report lower FIN 48 tax reserves than tax-minimizing firms, consistent with the former group using less uncertain transfer pricing arrangements. Collectively, our study provides direct evidence that multinational firms have differing internal priorities for transfer pricing, and that these differences are strongly related to the taxes reported by these firms.Prix de transfert : strat egies, pratiques et r eduction maximale de l'impôt R ESUM E A l'aide d'un sondage r ealis e aupr es des chefs de services de fiscalit e de soci et es multinationales, les auteurs etayent l'hypoth ese selon laquelle les soci et es qui etablissent leur strat egie en mati ere de prix de transfert visent parfois la r eduction maximale de l'impôt qu'elles ont a payer, mais plus souvent le respect de leurs obligations fiscales. Les auteurs estiment qu'une soci et e qui vise la r eduction maximale de l'impôt pr esente, en moyenne, un taux d'imposition effectif en conformit e avec les PCGR inf erieur de 6,6 points de pourcentage et environ 43 millions de dollars de plus en economies fiscales g en er ees qu'une soci et e qui vise le respect de ses obligations fiscales. Les donn ees COMPUSTAT disponibles sur les soci et es de l' echantillon confirment les inf erences reposant sur les r esultats de ce sondage. Les auteurs constatent egalement que les economies fiscales li ees aux prix de transfert sont plus

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“…Donohoe et al. () describe the failure of some companies to report their tax haven subsidiaries in their Exhibit 21.…”

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confidence: 99%

“…However, the data used in the two studies above are self-reported on 10-K Exhibit 21. Donohoe et al (2012) describe the failure of some companies to report their tax haven subsidiaries in their Exhibit 21.…”

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confidence: 99%

Transfer Pricing: Strategies, Practices, and Tax Minimization

Klassen

Lisowsky

Mescall

2016

Contemporary Accting Res

129

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“…Researchers are generally left with data that provide only an external, indirect view of fi rms' operations and internal transactions (Gordon and Hines 2002;Jacob 1996). In addition, there are many challenges in identifying international tax planning from fi nancial statements (see Donohoe et al 2012), leaving researchers to use less conventional methods and data sources. For example, Blouin et al (2012) use proprietary data from the Bureau of Economic Analysis (BEA) to examine transfer pricing within fi rms.…”

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confidence: 99%

Transfer Pricing: Strategies, Practices, and Tax Minimization

2013

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“…10 Given all of this information available to investors without the tax return, opponents of tax return disclosure argue that investors would not find any additional, meaningful information in tax returns (Lenter et al 2003;TEI 2006). However, commentators and academics continue to claim that it is nearly impossible to determine firms' taxable income and taxes payable from financial statements (Hanlon 2003;Mills and Plesko 2003;McGill and Outslay 2004;Donohoe et al 2012).…”

Section: Tax Informationmentioning

confidence: 99%

Is Tax Return Information Useful to Equity Investors?

Demeré

2018

SSRN Journal

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In this study, I examine whether tax return information is incrementally useful to equity investors relative to publicly-available information, such as financial statements. To test this relation, I exploit unique features of the syndicated loan market, as prior literature shows that lenders obtain tax returns from borrowers and that lenders' private information is transmitted to equity markets when institutional investors are part of a loan syndicate. I find economically significant increases in tax expense valuation and decreases in taxrelated market anomalies following the issuance of institutional syndicated loans, consistent with equity investors finding information about firm performance in tax returns that is useful for their trading decisions. I also document that tax returns are a valuable information source that can motivate institutional investor participation in loan syndicates. This study informs the important, ongoing policy debate over public disclosure of corporate tax return information and extends prior research by showing that investors use information from tax returns incremental to information in financial statements.

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Through a Glass Darkly: What Can We Learn About a U.S. Multinational Corporation's International Operations From Its Financial Statement Disclosures?

Cited by 55 publications

References 7 publications

Transfer Pricing: Strategies, Practices, and Tax Minimization

Transfer Pricing: Strategies, Practices, and Tax Minimization

Transfer Pricing: Strategies, Practices, and Tax Minimization

Is Tax Return Information Useful to Equity Investors?

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