Demand Uncertainty and Tax-Motivated Outbound Income Shifting

Abstract

ABSTRACT We examine how uncertainty affects U.S. multinational firms’ outbound income shifting. Based on the Joint Committee on Taxation (2010) Report, we contend that tax savings from income shifting are closely tied to sales and therefore expect that demand uncertainty is a relevant factor driving the association between uncertainty and income shifting. We find that both worldwide and regional demand uncertainties constrain outbound income shifting, and the impact of demand uncertainty is greater when the cost of modifying income-shifting structures is likely to be higher. We split common proxies for uncertainty into demand and profit margin components and find that only demand uncertainty is reliably negatively associated with outbound income shifting. Our study extends prior work linking uncertainty to investment in tax planning by linking the nature of an important set of tax minimization strategies—income shifting—to the relevant uncertainty construct and sheds light on the “undersheltering puzzle.” Data Availability: Data used in this study are available from public sources identified in the paper. JEL Classifications: D81; E22; H26; M40.