Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2015/21: Income Shifting under Losses

Arnt O. Hopland (), Petro Lisowsky (), Mohammed Mardan () and Dirk Schindler ()
Additional contact information
Arnt O. Hopland: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Petro Lisowsky: College of Business, University of Illinois at Urbana-Champaign, Postal: University of Illinois at Urbana-Champaign, College of Business, 196 Wohlers Hall, 1206 South Sixth Street, Champaign, IL, 61820, USA
Mohammed Mardan: ETH Zürich, Postal: ETH Zürich, KOF Konjunkturforschungsstelle, LEE G 116, Leonhardstrasse 21, 8092 Zürich, Switzerland
Dirk Schindler: Dept. of Accounting, Auditing and Law, Norwegian School of Economics, Postal: NHH , Department of Accounting, Auditing and Law, Helleveien 30, N-5045 Bergen, Norway

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

JEL-codes: F23; H25; H87

46 pages, September 16, 2015

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