Scandinavian Working Papers in Economics
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Department of Business and Management Science, Norwegian School of Economics (NHH) Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)

No 2015/21:
Income Shifting under Losses

Arnt O. Hopland (), Petro Lisowsky (), Mohammed Mardan () and Dirk Schindler ()

Abstract: This paper examines the flexibility of multinational firms to use income-shifting strategies within a tax year to react to operating losses. We develop a theoretical model that considers how affiliate losses can be adjusted ex post (i.e., after financial outcomes are revealed) or ex ante (i.e., before financial outcomes are revealed) by using transfer prices and internal debt. Our model predicts that under ex-post income shifting, loss affiliates have lower transfer prices and internal leverage than profitable affiliates, whereas under ex-ante income shifting, affiliates feature the same transfer prices and internal capital structure, regardless of making losses. Using data on direct transfer payments and internal debt of Norwegian affiliates, we find empirical evidence that, under losses, transfer pricing provides flexibility to adjust income shifting ex post, while we do not find evidence for flexibility in the use of internal debt to shift income ex post. Our study extends prior literature on income shifting that focuses largely on profitable firms and does not consider transfer pricing and internal debt shifting concurrently.

Keywords: Income shifting; losses; debt shifting; transfer prices; (follow links to similar papers)

JEL-Codes: F23; H25; H87; (follow links to similar papers)

46 pages, September 16, 2015

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