Tax‐avoidance strategies of American multinationals: an empirical analysis

This paper analyzes the opportunities of American multinationals to reallocate their profits into tax havens. In contrast to previous papers, a comprehensive look on the profit‐shifting process is undertaken by proposing three different tests. Multinationals in high‐tax countries have a lower equity ratio than affiliates in tax havens, indicating that income is shifted by extensively financing subsidiaries in high‐tax countries with debt. Furthermore, the share of retained earnings is lower in high‐tax countries owing to the unattractiveness of tax deferral. When testing for the outcomes of profit shifting, the results show that the pre‐tax profitability of American multinationals is higher in tax havens. This relationship is consistent with the opportunities of multinationals to shift income outside high‐tax jurisdictions. Finally, the paper shows that profit shifting largely takes place into tax havens, whereas other countries do not benefit from profit‐shifting activities. Copyright © 2009 John Wiley & Sons, Ltd.