Income Shifting Research Articles

Income Diversification and its Impact on Profitability of Banks

The paper is studying diversification in income of Indian banks and impact of income diversification on profitability and sustainability of industry, mainly in environment shift of recent financial crisis. Statistical analysis: The study is a multivariate regression analysis to find diversification score on the secondary data for Indian banking industry for sample period of 10 years, from 2008 to 2017. Score of diversifications are calculated at two stages as DS (1), DS (2) to find share of non-traditional income in total income and categorization in non-traditional income respectively. The impact on the different income categories ; Share of Non- Interest Income(SNI), Share of fee Based Income (S FI), Share of Other Income(SOT), are tested against selected control variables. F-test used to test hypothesis as direct association with two set of variables. Further criterion scores techniques (SIC), (AIC) and (HQIC) are use as model improvement to test goodness of fit of the model. The study found that income shift of new business lines helps banks to improve their profitability by dint of many barriers in implementation. The growth trend of such income is not stable during whole study period, majorly due to global financial crisis. In the library of literatures, the share of non-interest based income activities and fee based income sources has been more distinct for Private and Foreign banks, even though SBI and Its associate’s banks are not far behind them. The role of the study to highlight the path for banks adopting new Non-interest income streams to enhance profitability and continuity in profitability. As reported, diversification in non-interest income sources may have positive impact on overall profitability and risk-adjusted performance along with improvement in stability of banking system. Other non-interest incomes are more changeable in compare to Fee based income generated by fee, commission and brokerage activity. By dint of many good effect of diversification banks, mainly in Indian context should take appropriate majors while diversification of its income.

The Effect of Innovation Box Regimes on Income Shifting and Real Activity

We study whether innovation box tax incentives, which reduce tax rates on innovation-related income, are associated with tax-motivated income shifting, investment, and employment in the countries that implement these regimes. Using a sample of European and U.S. multinationals' subsidiaries operating in Europe and three income shifting models, we find some evidence that firms shift less income out of relatively high statutory tax rate countries following the implementation of an innovation box. We also find that innovation box regimes successfully increase employment but do not result in significant increases in fixed asset investment. Our study contributes to the literature by evaluating multiple income shifting models and informing the ongoing policy debate regarding the economic effects of innovation box regimes.

Concerns regarding immigration in Germany: how subjective fears, becoming unemployed and social mobility change anti-immigrant attitudes

ABSTRACT This article analyzes how anti-immigrant attitudes shift when individuals experience changes in their subjective and objective economic situations. To do this, we use data from the German Socio-Economic Panel Study (GSOEP, N ≈ 14,700) and apply fixed-effects multinomial logit panel regression models as a statistical framework. The social identity approach is applied as a theoretical perspective to explain how individual incidents can lead to group-based devaluations. Our findings show almost no effect of social mobility and shifts in the household income, while more disruptive events, such as becoming unemployed, significantly increase the probability of having stronger anti-immigrant attitudes. However, the largest shift in anti-immigrant attitudes is observed when fears of a worsening economic situation increase.

Tax and Nontax Incentives in Income Shifting: Evidence from Shadow Insurers

ABSTRACTUsing the shadow insurance setting, we study the interplay between tax and nontax incentives in income shifting. Shadow insurance involves intercompany transactions designed to help firms meet regulatory capital requirements. However, prior to the Tax Cuts and Jobs Act of 2017 (TCJA), foreign-owned life insurance firms could save taxes by using shadow insurance to shift U.S. profits to tax havens. Consistent with expectations, we find that while nontax incentives appear to be the dominant factor behind firms' use of shadow insurance, tax considerations also played a role for certain firms. We also find that shadow insurance is associated with lower liquid asset holdings and increased credit risk. Overall, our results suggest that taxes were an important incentive for foreign-owned life insurance firms to use shadow insurance pre-TCJA. Moreover, in this setting, nontax considerations appeared to have motivated U.S.-owned firms' use of tax havens.

Implicit Corporate Taxes and Income Shifting

ABSTRACT The effects of tax rate changes on corporate profitability are not fully understood. Implicit tax theory predicts a positive relation between country-level tax rates and firm-level pretax returns. Conversely, income shifting should make reported pretax returns inversely related to tax rates. Among single-country European firms, we find robust evidence of corporate implicit taxes following tax rate changes, concentrated in firms that rely less on intangible assets and firms in closed economies (non-EU countries). Among multinational firm affiliates, we find the effects of income shifting outweigh the effects of implicit taxes for firms with high intangibles and in countries with open borders. Our results imply income shifting estimated using only reported profits is less biased by implicit taxes in settings with open economies and firms with unique inputs or products. Our evidence also helps explain prior evidence of decreasing corporate implicit tax effects over time, particularly for multinationals.

Political Economy of Cross-Border Income Shifting: A Protection-Racket Approach

Multinational firms often shift their incomes to low-tax jurisdictions, thus robbing host states of tax revenue. I offer a new theory to explain why some firms do this while others do not. I argue that firms that are more vulnerable to government expropriation are, counterintuitively, less likely to shift income offshore, since complying fully with tax law gives the government a greater stake in their survival. Analyzing a registry-based panel data on multinational firms, their tax burdens, and a cross-sectional information of the firms’ connections to tax havens, l find that, other things equal, firms with more concentrated fixed assets are less likely to use havens. These results challenge existing theories of the political economy of development. Whereas the “Pillars of Prosperity” theory suggests that successful states simultaneously develop protection of property rights and fiscal capacity, my results show that perfect property rights protection can actually undermine the state’s ability to tax. In a world of frictionless international capital flows, some level of expropriation risk may be necessary to prevent a fiscal crisis due to evasion.

Income Shifting by NOL Firms When Loss Carry-Forward Period is Extended

Income Shifting by NOL Firms When Loss Carry-Forward Period is Extended

Implications of Flexibility in Income Shifting under Losses

This study develops theory and discusses implications of inflexibility in tax-motivated income shifting. We show that inflexibility to adjust income-shifting strategies within a tax year in response to losses implies that income-shifting incentives are based on the expected rather than the statutory tax rate differential. This has important implications for empirical research as our finding suggests that using the statutory tax rate differential risks underestimating the tax sensitivity of income shifting. We propose several empirical remedies to mitigate the estimation bias stemming from inflexibility, whenever a direct test is not feasible. The remedies vary in their data requirements, which allows future work on tax sensitivities of income to take into account inflexibility.

Does Private Country-by-Country Reporting Deter Tax Avoidance and Income Shifting? Evidence from BEPS Action Item 13

To combat tax avoidance by multinational corporations, the Organisation for Economic Cooperation and Development introduced country-by-country reporting, requiring firms to provide tax authorities with a geographic breakdown of their profitability and activity. Treating the introduction of country-by-country reporting in the European Union as a shock to private disclosure requirements, this study examines the effect on corporate tax outcomes. Exploiting the €750M threshold and employing a regression discontinuity and difference-in-difference design, I document a 1%–2% increase in consolidated GAAP effective tax rates of the affected firms. I also find some evidence consistent with a decline in tax-motivated income shifting starting in 2018. These results suggest that while private geographic disclosures can have a deterrent impact on overall corporate tax avoidance, the regulations have so far had a limited effect on tax-motivated income shifting. The findings of this study have important policy implications for the global implementation of private country-by-country reporting and add to the ongoing debate on public versus private disclosure of tax information.

Political Economy of Cross-Border Income Shifting: A Protection Racket Approach

Multinational firms often shift their incomes to low-tax jurisdictions, thus robbing host states of tax revenue. I offer a new theory to explain why some firms do this while others do not. I argue that firms that are more vulnerable to government expropriation are, counterintuitively, less likely to shift income offshore, since complying fully with tax law gives the government a greater stake in their survival. Analyzing a registry-based panel data on multinational firms, their tax burdens, and a cross-sectional information of the firms’ connections to tax havens, l find that, other things equal, firms with more concentrated fixed assets are less likely to use havens. These results challenge existing theories of the political economy of development. Whereas the “Pillars of Prosperity” theory suggests that successful states simultaneously develop protection of property rights and fiscal capacity, my results show that perfect property rights protection can actually undermine the state’s ability to tax. In a world of frictionless international capital flows, some level of expropriation risk may be necessary to prevent a fiscal crisis due to evasion.

Intertemporal Income Shifting and Tax Evasion: Evidence From an Uruguayan Tax Reform

This paper provides empirical evidence on intertemporal income shifting during the implementation of a major tax reform in Uruguay. We exploit VAT and income tax returns for the universe of individuals that declare activity as liberal professionals (e.g. lawyers, public notaries, architects, engineers and accountants) during the years around the reform. Using a difference-in-difference approach, we document large shifting responses of personal business income in the month before the reform became effective. After controlling for fixed effects, on average an amount of 134,900 Uruguayan pesos (approx. 5,690 USD) is shifted in order to receive a beneficial fiscal treatment. This amount represent 99% of the average bi-monthly income reported in 2007. The income shifted increases up to 142.6 and 174.4% of the average reported income for the top 5 and top 1 percentiles. Furthermore, we show that architects and engineers, public notaries, and lawyers respond much stronger, especially if they perform their activity in the capital city. This suggests that income shifting, as a means of tax evasion, depends on the information spillovers and the salience of the tax reform.

Foreign Employment, Income Shifting, and Tax Uncertainty

We examine the effect of foreign employment on two outcomes—income shifting and the tax uncertainty of foreign transactions. Using a hand-collected sample of employment disclosures, we partition our sample into firm-years with a higher or lower degree of foreign employment. Using two distinct income shifting models, we document that, on average, a high degree of foreign employment is associated with greater tax-motivated income shifting out of the U.S. We also posit and find that a high degree of foreign employment enhances the economic substance of foreign transactions, reducing the tax uncertainty associated with foreign income. We conduct additional analyses to mitigate selection bias concerns, and we use exogenous changes to the costs and benefits of income shifting using foreign employment to strengthen identification. Our results highlight firms’ use of employees as part of a tax-efficient supply chain and how foreign employment enhances income shifting opportunities between jurisdictions.

The Influence of Income Shifting Incentives towards The Tax Haven Country Utilization: Case Study on the Companies listed in Indonesian Stock Exchange

This study aims to determine the association between a series of income shifting incentives, including multinationality, transfer pricing aggressiveness, thin capitalization, intangible assets, and tax haven country utilization. This study is based on a sample of 78 multinational companies listed on the Indonesia Stock Exchange over 2012–2016 period (390 firm-year). The results prove that, multinationality, thin capitalization, intangible asset are positively associated with tax haven utilization, while transfer pricing aggressiveness is not positively associated with tax haven utilization. Based on the additional analysis, basic and chemicals sectors have the highest association between a series of income shifting incentives and tax haven utilization among other industrial sectors and each industry sector has different ways of utilizing tax haven country. The findings of this study are expected to provide input to the Directorate General of Taxes the importance of reviewing debt to equity ratio rule which turned out to be one gap for the taxpayer and in making the proposed inspection plan and the potential thematic exploration related to profit shifting incentives more focused on basic industry and chemicals sector. The Directorate General of Taxes also needs to raise awareness of the taxpayers of agriculture, mining, basic and chemicals, and trade, service and investment, which has a growing number of subsidiaries in tax haven country. Increased supervision of intangible assets transfers in the agriculture and infra­structure, utilities & transportation sectors also needs to be done.

Developing a GIS of Hazards for Canadian Cultural Institutions

The Canadian Conservation Institute (CCI) has developed a Geographic Information System (GIS) of hazards for Canadian cultural heritage institutions. The greatly increased access to open data is changing how advisory bodies like the CCI and the public can access and share information. For the purpose of investigating how a GIS approach can assist the CCI with its mandate to improve the preservation of collections, a map layer of cultural heritage institutions across Canada has been assembled and continues to be upgraded for accuracy, inclusion and detail (Fig. 1). This was combined with a collation of hazard layers; a partial list includes: seismic risk, notably expectations of earthquake severity tied to improvements in the national building code, tsunami exposure, wildfire data, hurricane, tornado, lightning density, pest distribution, and energy use indicators such as heating degree days and climate norm data. The platform allows examination of expectations around climate change driven risks such as sea-level rise, storm-incursions, permafrost melt. The GIS approach will also allow reassessments around expected changes to flood risk maps issued by jurisdictions, as well as Statistics Canada layers on population related factors such as changes in numbers of local populations, income and demographic shifts which can be stressors or opportunities. Sources have been drawn from federal, provincial, municipal, and academic evaluations of hazards, which now are more commonly published as GIS products. Mapping Canadian heritage institution's within a GIS improves our ability to: visualise and interpret to clients the relative magnitude of their local hazards, make ties to more refined local analyses, and show adjacencies to mapped historical events. From a national perspective the GIS can generate profiles of aggregated institutional exposure to the hazards, and more readily identify sub-populations of institutions for which particular risks would rank higher or lower among their concerns. This improves CCI's preventive conservation advisory service's perspective on mappable risks for any institution we deal with as clients. Ultimately, through federal initiatives in open data, it is our intention that client groups can look at the GIS for the purpose of educating themselves on hazards they would want to prepare for.

High-frequency Spending Responses to the Earned Income Tax Credit

Many households face large, high-frequency changes in income and have limited financial buffers to smooth their consumption through this income volatility. However, few studies have quantified spending responses to such timing shifts in income due to a lack of high-frequency spending data. We use a new dataset of anonymized daily, state-level spending to study a two-week delay in federal tax refunds with an earned income tax credit (EITC) in 2017.

The Financial Repression Index: U.S Banking System Since 1984

This paper reviews the research literature concerning financial repression. The paper then presents an empirical measure for financial repression in the US banking system entitled “The Financial Repression Index,” drawing upon public data going back to the early 1980s The paper draws some preliminary conclusions about the economic impact of financial repression in the US based upon observations of the banking system and related data. Overall this paper concludes that bank depositors and investors have been the victims of significant financial repression since the 1990s and particularly since the 2008 financial crisis as measured by the dramatic shift in net interest income in favor of banks. The paper also concludes that while banks themselves have received a significant subsidy due to financial repression, banks have also suffered decreased asset returns as a result of the low interest rates policies and open market operations of the Federal Open Market Committee.

Income Shifting as an Aspect of Tax Avoidance: Evidence from U.S. Multinational Corporations

We use jurisdiction-specific effective tax rates (ETRs) to investigate income shifting as an aspect of tax avoidance by U.S. firms. Our central prediction is that tax-based incentives for shifting income, as measured by the spread between domestic and foreign ETRs, should be reflected in the share of pre-tax income earned by U.S. firms in foreign jurisdictions. The data lend substantial support to this prediction. We find robust evidence of a positive correlation between the foreign share of pre-tax income and the ETR spread that is consistent with firms shifting income both into and out of the United States. The evidence also indicates that firms respond asymmetrically to positive and negative ETR spreads. Specifically, the response to a negative spread is stronger than to a positive spread of the same magnitude.

The Growing Heterogeneity in the Farm Sector and Its Implications*

AbstractThe farm sector has moved from one that was very homogeneous to one with significant differences in size and/or orientation. The decline in the number of “average‐sized” farm and the growth in the number of large farms are due primarily to technological innovations that push operations producing commodities to grow as a means of capturing economies of size. The increase in the relative number of small farms is also due partially to technical advances that allow for the production of food goods with the desired quality attributes to be delivered to the appropriate market. This market is continually being differentiated due to demographic and income shifts. The growing heterogeneity in farm structure complicates the assessment and design of farm policy. The social policy objective of improving the livelihood of farmers and their families could be achieved through farm support and extension programs when the sector was homogeneous. The policy objective has shifted toward improving the competitiveness of the sector, but for which of its components? The trend toward greater heterogeneity is likely to continue and thus so will the internal and external support for any policies targeted toward the farm sector.

Internal Information Quality and Tax-Motivated Income Shifting

ABSTRACTThis study examines whether the quality of a firm's internal information environment influences its tax-motivated income shifting activities. Although income shifting is an important tax-planning strategy, evidence regarding its determinants is limited. We find that higher internal information quality (IIQ) is associated with greater tax-motivated income shifting, which suggests that higher IIQ enables managers to better identify and execute income shifting opportunities. We find that the influence of IIQ on tax-motivated income shifting varies with firm characteristics. Specifically, we find that higher IIQ is associated with tax-motivated income shifting for firms with greater uncertainty and greater coordination needs. Overall, these results suggest that the improved information obtained through higher-quality internal information environments allows managers to increase tax-motivated income shifting.

Income Shifting in the Spanish Dual Income Tax*

AbstractBased on a model of behavioural response to taxes, and using the Taxpayers Panel from the Instituto de Estudios Fiscales for the period 1999–2009, we analyse whether the dual nature of the Spanish personal income tax (PIT), reinforced by the 2007 reform, has influenced taxpayers’ behaviour, causing them to convert part of their ‘general income’ (from labour, real estate or economic activities) into ‘savings income’ (from movable capital or capital gains). We also extend the analysis of income shifting and study whether Spanish taxpayers also responded to the different tax treatments given to the two types of savings income (from movable capital and capital gains) until 2007, transforming savings income from one type to the other. The results of our study demonstrate three facts. First, Spanish taxpayers did respond to the different tax rates, shifting income from the general base to different forms of savings, especially capital gains. The highest‐income individuals and the self‐employed and business owners are the groups where this behaviour was most marked. Second, the self‐employed and business owners also turned income from movable assets into capital gains, guided by their different tax rates. And third, we find signs of ‘anticipation’ and ‘learning’ effects caused by the 2007 tax reform. We believe that the results obtained will enrich the growing literature on income shifting.