ATA Doctoral Consortium

1
ATA Doctoral Consortium

• Multinational Tax Research
• in Accounting
• Kaye J. Newberry
• University of Houston

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Outline of Presentation

• Why is multinational tax research in accounting
  important?
• Advantages of working in this area
• Challenges to working in this area
• Microeconomic framework
• Overview and examples
• Future directions

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Why is Multinational Tax Research
Important?

• Globalization of Companies
• For 1996, U.S. companies reported 2.7 trillion
  in assets for their 7500 largest foreign
  corporations.
• Many business decisions are now made in a global
  context.
• Use of foreign entities as reporting havens
  e.g., special purpose entities and corporate tax
  shelters.

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Why is Multinational Tax Research
Important?

• Contributes to our knowledge of investing and
  financing decisions
• Worldwide investment decisions
• Production/ financial investments
• Reinvestment of foreign earnings
• Financing choices
• Foreign tax credit limitations
• Income-shifting mechanism

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Why is Multinational Tax Research Important?

• Provides insights regarding income reporting
  incentives
• Cross-jurisdictional income shifting
• Management of effective tax rates (Xerox
  Corporation)

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Why is Multinational Tax Research Important?

• Managerial accounting links
• Transfer prices used to accomplish tax-motivated
  income shifting
• Managers say transfer pricing complicates
• bonus calculations
• operating measurements
• internal management fees
• overhead allocations

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Why is Multinational Tax Research
Important?

• Economic tax policy implications
• Income shifting studies provide insights
  regarding U.S. inflows and outflows of tax
  revenues
• Studies of investing and financing decisions
  provide insights regarding capital market
  distortions

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Advantages of Conducting
Multinational Tax Research

• Effects are widespread and interdisciplinary
• Rich theoretical base to draw on
• Corporate finance theory
• Positive accounting theory
• Managerial accounting theory

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Advantages of Conducting
Multinational Tax Research

• Powerful research setting
• Variation in tax rates, tax systems, and
  accounting systems
• Firm-level variation in U.S. corporations tax
  incentives
• Accountants have a comparative advantage
• Institutional knowledge
• Training in microeconomic theory

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Challenges to Conducting
Multinational Tax Research

• Requisite Skill Set
• Knowledge of complex tax and accounting rules
• Knowledge of international business environment
• Strong background in economic and corporate
  finance theory

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Challenges to Conducting
Multinational Tax Research

• Data, Data, Data
• Privately-held information on organizational
  structure and company transactions
• Firm-level tax return information is confidential
• Measurement of non-tax incentives is difficult

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Challenges to Conducting
Multinational Tax Research

• On the positive side, the availability of
  databases is increasing
• U.S. data
• Compustat (63, 64, 272, 273)
• Geographic segment tapes
• Stock data (cross-listings, etc.)
• U.S. corporate tax return data

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Challenges to Conducting Multinational
Tax Research

• International Data
• Global Vantage
• Worldscope (gt 20,000 companies)
• PACAP (Pacific-Basin Countries)
• Transaction Data
• SDC New Issues
• SDC Mergers and Acquisitions
• Dealscan

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Microeconomic Research Framework

• Scholes-Wolfson approach to empirical tax
  research
• Conceptual Framework
• Effective tax planning ? tax minimization
• The importance of considering
• All taxes
• All parties
• All costs

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Microeconomic Research Framework

• All taxes
• Explicit taxes (income taxes, withholding taxes,
  etc.)
• Implicit taxes
• reduction in pre-tax returns earned from tax
  favored assets
• investment in low-tax rate country (after-tax
  returns could be low)

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Microeconomic Research Framework

• All parties
• Tax authorities (an unwelcome contracting party)
• Financial statement users (shareholders,
  creditors, etc.)
• Managers
• Employees

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Microeconomic Research Framework

• All costs
• Tax audit costs and political scrutiny
• Financial reporting/ contracting costs
• Managerial incentives/ agency costs
• Institutional features (capital markets, business
  norms, etc.)

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Research Overview

• Investing decisions
• Multinational tax incentives influence
• Production location decisions (e.g., Kemsley
  1998)
• Reinvestment vs. repatriation of foreign earnings
  (e.g., Krull 2004)
• Importance of non-tax factors

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Research Overview

• Financing decisions
• Foreign tax credit limits influence
• Use of preferred stock (Collins and Shackelford
  1992)
• Public offerings of domestic debt versus equity
  (Newberry 1998)
• Worldwide debt location decisions (e.g, Newberry
  and Dhaliwal 2001)
• Debt funding for corporate acquisitions (Dhaliwal
  et al. 2005)

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Research Overview

• Financing decisions
• Importance of non-tax incentives
• Capital structure theory constructs
• Institutional features of capital markets

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Research Overview

• Cross-jurisdictional income shifting
• U.S. versus foreign income reporting patterns
  surrounding TRA1986
• Broad income patterns (Klassen et al. 1993,
  Harris 1993, Jacob 1996)
• Ability to shift (Harris 1993, Jacob 1996)

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Research Overview

• Cross-jurisdictional income shifting
• Firm-level differences in U.S. versus foreign
  income reporting incentives
• Collins, Kemsley and Lang (1998)
• Newberry and Dhaliwal (2001)
• Mills and Newberry (2004)
• Income shifting within a jurisdiction
• Multistate taxation
• Japan (Gramlich et al. 2004)

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Research Improvements

• Tests of firm-level incentives
• Data sources
• Consideration of firm valuation and accounting
  incentives
• Tests of alternative contexts and shifting
  mechanisms

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Three Examples

• Why did I choose these papers?
• Published in top-tier accounting journals
• Different research settings, designs, and data
  sources

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Newberry and Dhaliwal 2001

• Research Question
• Do tax incentives influence where U.S.
  multinationals locate their interest deductions
  worldwide?
• Sample
• 220 firm-years from 1987-1997.
• International bond offerings denominated in
  currencies of G-7 countries (not U.S.) and
  Australia.

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Newberry and Dhaliwal 2001

• Data Sources
• SDC new issues database, directories of corporate
  affiliations, Compustat, annual report footnotes,
  and survey questionnaires to CFOs in sample.
• Empirical Approach
• Logistic regression of placement (foreign vs.
  U.S.) to firm-specific tax attributes,
  country-level tax regimes, and controls for
  market, size, etc.

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Newberry and Dhaliwal 2001

• Primary Findings
• Firms with excess foreign tax credits are more
  likely to issue bonds through foreign subsidiary.
  Result is economically significant.
• U.S. tax losses influence firms to place offering
  overseas but only affects 5 of sample.
• Country-level tax regimes make a difference with
  more foreign placements in high-tax countries.

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Newberry and Dhaliwal 2001

• Incremental Contributions
• Extension of corporate finance theory. Debt
  location decisions take into account
  jurisdiction-specific tax loss carryforwards and
  credit limits.
• Debt location decisions can achieve tax-motivated
  income shifting.

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Krull 2004

• Research Questions
• Do firms use the permanently reinvested earnings
  (PRE) designation to manage financial earnings?
• Do PRE amounts reflect investment and tax
  incentives (secondary question)?

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Krull 2004

• Sample
• 805 firm-year observations for 1993-1999.
• U.S. multinationals on 2001 Compustat Industrial
  file with necessary data (including disclosure of
  permanently reinvested earnings).

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Krull 2004

• Data Sources
• Annual report footnotes, Compustat, geographic
  segment files, IBES.
• Empirical Approach
• Regression of change in PRE to 1) earnings
  management variables, 2) interactions with
  foreign tax credit position, 3) investment/tax
  variables, and 4) control variables.

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Krull 2004

• Primary Findings
• Firms with pre-managed earnings that miss analyst
  forecasts lower their deferred tax expense by
  designating more low-tax rate foreign earnings as
  permanently reinvested.
• Firms with relatively high foreign after-tax
  returns and tax incentives to reinvest designate
  more foreign earnings as permanently reinvested.

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Krull 2004

• Incremental Contributions
• Evidence of earnings management in new setting.
• Modeling of economic incentives.

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Gramlich, Limpaphayon, Rhee 2004

• Research Question
• Does Keiretsu affiliation affect tax-motivated
  income shifting among Japanese firms?
• Sample
• 12,357 firm-years of non-financial and
  non-utility firms on the Tokyo Stock Exchange
  during 1977-1997.

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Gramlich, Limpaphayon, Rhee 2004

• Data Sources
• PACAP-Japan and Industrial Groupings in Japan.
• Empirical Approach
• Regression of pre-tax income/ firm value to
  marginal tax rate, keiretsu dummy, presidents
  council dummy, interactions, and control
  variables.

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Gramlich, Limpaphayon, Rhee 2004

• Primary Findings
• Relative to independent firms, keiretsu firms
  pre-tax return on firm value is less positively
  related to marginal tax rate.
• Stronger effect found for presidents council
  firms.
• Evidence of compensation to income shifters
  (supplemental analysis).

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Gramlich, Limpaphayon, Rhee 2004

• Incremental Contributions
• Evidence of income shifting between
  differentially taxed entities within the same
  jurisdiction using new data.
• Suggests bias in financial statements of Japanese
  keiretsu members.

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Future Directions

• More theory-based tests
• More interdisciplinary studies
• Continued focus on increasing power of tests
  (theory, data, modeling tradeoffs)
• Be creative and explore new areas!