Stateless Income's Agency Problem: Are Multinational Corporations Acting in the Best Interest of Shareholders through the Creation of Stateless Income?

Abstract

In a series of recent groundbreaking articles, Edward Kleinbard has brought to light the emergence of multinational corporations’ ability to pay effectively zero income taxes on their international operations through the creation of what he calls “stateless income.” Kleinbard explains economic and policy implications that result from stateless income, and he provides a possible solution addressing these policy concerns. In addition to addressing tax policy implications of stateless income, Kleinbard makes passing comments about how the shareholders of corporations that create stateless income are adversely affected by their managers employing these tactics. Unlike with his policy concerns, Kleinbard fails to expound on why shareholders are disadvantaged by the emergence of stateless income. It is this article’s purpose to inquire into the question left unexplored by Kleinbard: are multinational corporations acting in the best interests of shareholder through the creation of stateless income?To give some background on this subject this article will first explain some foundational tax principles. Second, it will explain Kleinbard’s concept of stateless income and how the creation of stateless income leads to a lock-out of income earned in foreign markets. Third, the article will explain that the lock-out effect of stateless income may in fact exemplify an agency problem. And finally, the article will explore arguments supporting and countering the claim that stateless income is in the shareholders’ best interests. Ultimately, the article concludes that it is unclear if stateless income tax planning is in shareholders’ best interests, but nevertheless, shareholders should be part of the tax reform conversation to have their position articulated.