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Tax Law Asymmetries and Income Shifting: Evidence from Japanese Capital Keiretsu

Author

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  • Onji Kazuki

    (Australian National University)

  • Vera David

    (Kent State University)

Abstract

While the asymmetric treatment of positive and negative income creates clear tax incentives to shift income among a group of closely related corporations, attempts to document the impact of such behavior on economic outcomes are relatively sparse. We aim to provide evidence on tax-motivated transfers from a large dataset of Japanese corporate groups. Using company level data on 33,340 subsidiary time pairs from 1988, 1990, and 1992, we consider testable implications of income shifting in a theoretical model tailored to the Japanese institution of the early 1990s and empirically examine the spread of the profitability distribution, the attrition rate of loss-making subsidiaries, and the propensity to report zero profit. The findings suggest that income shifting was pervasive when Japan had not adopted a formal allowance for group-level tax. The result underscores the importance of accounting for the inter-relatedness of companies, in designing a corporate income tax.

Suggested Citation

  • Onji Kazuki & Vera David, 2010. "Tax Law Asymmetries and Income Shifting: Evidence from Japanese Capital Keiretsu," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-35, January.
    • Handle: RePEc:bpj:bejeap:v:10:y:2010:i:1:n:4
    DOI: 10.2202/1935-1682.2246
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    Cited by:

    1. Arnt Ove Hopland & Petro Lisowsky & Mohammed Mardan & Dirk Schindler, 2014. "Income Shifting under Losses," CESifo Working Paper Series 5130, CESifo.
    2. Kazuki Onji, 2013. "Who participates in corporate income tax consolidation? Evidence from Japan," AJRC Working Papers 1303, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
    3. Ji Lee, Ye & Seon Yoo, Ji, 2023. "Loss expectation and income shifting," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(2).
    4. repec:csg:ajrcwp:03 is not listed on IDEAS

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    Keywords

    tax avoidance; business group; corporate income tax;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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