Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada

By Jack Mintz, Michael Smart. Social Science Research Network, 2001

387 citations recorded by the source corpus.

We study corporate income taxation when firms operating in multiple jurisdictions can shift income using tax planning strategies. Because income of corporate groups is not consolidated for tax purposes in Canada, firms may use financial techniques, such as lending among affiliates, to reduce subnational corporate taxes. A simple theoretical model shows how income shifting affects real investment, government revenues, and tax base elasticities, depending on whether firms must allocate income to provinces or not. We then analyze data from administrative tax records to compare the behaviour of corporate subsidiaries that may engage in income shifting to comparable firms that must use the statutory allocation formula to determine their taxable in each province. The evidence suggests that income shifting has pronounced effects on provincial tax bases. According to our preferred estimate, the elasticity of taxable income with respect to tax rates for “income shifting” firms is 4.9, compared to 2.3 for other, comparable firms.

Subfields: Accounting, Economics and Econometrics, Political Science and International Relations

View Paper: https://www.semanticscholar.org/paper/e10904c22db869538ba4bc219bf1d6e6f48789e5

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Citations in the corpus

Capital tax competition: bane or boon (2004, background): “Mintz and Smart (2001) analyze the potential for income shifting among jurisdictions by multi-jurisdictional enterprises.”
Firms' Financial Choices and Thin Capitalization Rules under Corporate Tax Competition (2012, background): “First, there are several studies that analyze the effects of corporate taxation on multinational firms’ financing and investment decisions (Mintz and Smart, 2004; Schindler and Schjelderup, 2008; Weichenrieder and Windischbauer, 2008; Buettner et al., 2009; Keuschnigg and Ribi, 2009).”
The capital structure of multinational companies under tax competition (2009, background): “C B r+ + P2 i=1D j i i B before default, (24)”
Do Countries Compete over Corporate Tax Rates (2008, neutral): “Recent relevant papers include Elitzur and Mintz (1996), Haufler and Schjelderup (2000), Raimondos-Moller and Scharf (2002), Nielsen et al. (2003), and Mintz and Smart (2004).”
The Indirect Side of Direct Investment: Multinational Company Finance and Taxation (2010, background): “Until recent years, empirical evidence showing the dependency of financing structures was often lacking, prompting Myers (1984) to raise doubt if there would ever be such evidence.”
Tax Avoidance and Geographic Earnings Disclosure (2013, positive): “Consistent with the theoretical model developed by Mintz and Smart (2004), this finding suggests that material operations located in low-tax regions reduce firms' need to use cross-jurisdictional income shifting to avoid taxes.”
International Tax Competition and Coordination (2014, neutral): “18 Mintz and Tulkens (1996) is an exception.”
Taxes and entrepreneurial risk-taking: Theory and evidence for the U.S. ☆ (2007, background): “In general, such income shifting generates both real costs, due to changes in cash flow and accounting profits within each firm as in Mintz and Smart (2004), and a greater risk of IRS audit and disallowance when reported income is clearly inconsistent with the economic activity undertaken by each…”
Saving Taxes Through Foreign Plant Ownership (2010, neutral): “…through the endogenous choice of prices of intermediate inputs delivered among plants of the same firm to minimize tax payments at the company level (see, e.g., Gordon and Wilson, 1986; Weichenrieder, 1996a; Haufler and Schjelderup, 2000; Bartelsman and Beetsma, 2003; Mintz and Smart, 2004).”