The Effective Income Tax Experience of U.S. and Non-U.S. Multinationals

Abstract

In this paper we examine how the incorporation of a parent firm outside the United States affects the effective income tax rates of global firms with material business operations in the U.S. We find that for profit firm years, firms with a non-U.S. parent corporation have lower effective tax rates than firms with a U.S. parent. However, in loss firm years we find that these non-U.S. firms report smaller negative tax expense. We find no statistically significant difference in outcomes if the non-U.S. firm engaged in an inversion transaction. We provide evidence that earnings stripping opportunities available to non-U.S. firms and the worldwide tax law applicable to U.S. firms contribute to the better tax results of non-U.S. firms in profit years. For loss firm years, we find evidence that the U.S. worldwide tax law and differences in valuation allowance practice support better tax outcomes for U.S. firms.