TY - JOUR

T1 - Taxation and the allocation of risk inside the multinational firm

AU - Becker, Johannes

AU - Johannesen, Niels

AU - Riedel, Nadine

PY - 2020/3

Y1 - 2020/3

N2 - This paper provides the first theoretical and empirical analysis of how taxation shapes the joint allocation of risk and profits inside the multinational firm. Theoretically, we identify three mechanisms through which corporate taxes may shape the within-firm allocation of risk: (1) transfer pricing rules requiring risk to be compensated with higher expected returns create incentives to shift risk to low-tax jurisdictions as a means to shift profits; (2) risk-averse owners create incentives to allocate risk to high-tax affiliates to maximize risk-sharing with governments; (3) limited loss offset creates incentives to shift risk to affiliates in other countries. Empirically, we show that multinational firms disproportionately allocate risk to low-tax countries and that the key mechanism is the nexus between risk and profits established by transfer pricing rules. Within-firm differences in risk explain a significant fraction of the well-established correlation between profits and tax rates suggesting that risk shifting is a quantitatively non-negligible channel for profit shifting.

AB - This paper provides the first theoretical and empirical analysis of how taxation shapes the joint allocation of risk and profits inside the multinational firm. Theoretically, we identify three mechanisms through which corporate taxes may shape the within-firm allocation of risk: (1) transfer pricing rules requiring risk to be compensated with higher expected returns create incentives to shift risk to low-tax jurisdictions as a means to shift profits; (2) risk-averse owners create incentives to allocate risk to high-tax affiliates to maximize risk-sharing with governments; (3) limited loss offset creates incentives to shift risk to affiliates in other countries. Empirically, we show that multinational firms disproportionately allocate risk to low-tax countries and that the key mechanism is the nexus between risk and profits established by transfer pricing rules. Within-firm differences in risk explain a significant fraction of the well-established correlation between profits and tax rates suggesting that risk shifting is a quantitatively non-negligible channel for profit shifting.

U2 - 10.1016/j.jpubeco.2020.104138

DO - 10.1016/j.jpubeco.2020.104138

M3 - Journal article

AN - SCOPUS:85078950026

VL - 183

JO - Journal of Public Economics

JF - Journal of Public Economics

SN - 0047-2727

M1 - 104138

ER -