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Income Shifting under Losses

Hopland, Arnt O.; Lisowsky, Petro; Mardan, Mohammed; Schindler, Dirk
Working paper
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URI
http://hdl.handle.net/11250/300080
Date
2015-09-16
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  • Discussion papers (FOR) [509]
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.
Publisher
FOR
Series
Discussion paper;21/15

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