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Taxation and the allocation of risk inside the multinational firm
Ist Teil von
Journal of public economics, 2020-03, Vol.183, p.104138, Article 104138
Ort / Verlag
Elsevier B.V
Erscheinungsjahr
2020
Link zum Volltext
Quelle
Elsevier ScienceDirect Journals Complete
Beschreibungen/Notizen
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.
•We study how taxes shape the allocation of risk within multinational firms (MNFs).•Different mechanisms are identified that link risk allocation to corporate taxes.•Empirically, we show that MNFs distort risk allocation towards low-tax entities.•Key mechanism is the risk-profit-nexus established by transfer pricing rules.•Risk shifting is identified to be a quantitatively relevant profit shifting channel.