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Does a common set of accounting standards affect tax-motivated income shifting for multinational firms?

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  • De Simone, Lisa

Abstract

I test whether adoption of IFRS by individual affiliates of multinational entities (MNEs) for unconsolidated financial reporting facilitates tax-motivated income shifting. MNEs often justify transfer prices to tax authorities by benchmarking intercompany profit allocations against a range of book profit rates reported by economically comparable, independent firms that use similar accounting standards. Additional qualifying benchmark firms resulting from IFRS adoption could allow managers to support more tax-advantaged transfer prices. Using a database of European unconsolidated financial and ownership information over 2003–2012, I first document an increase in the arm’s length range of book profits reported by potential IFRS benchmark firms following affiliate adoption of IFRS. I then estimate a statistically and economically significant 11.3 percent tax-motivated change in reported book pre-tax profits following affiliate IFRS adoption, relative to pre-adoption and non-adopter affiliate-years.

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  • De Simone, Lisa, 2016. "Does a common set of accounting standards affect tax-motivated income shifting for multinational firms?," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 145-165.
    • Handle: RePEc:eee:jaecon:v:61:y:2016:i:1:p:145-165
    DOI: 10.1016/j.jacceco.2015.06.002
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    3. Putzhammer, Moritz & Puck, Jonas & Lindner, Thomas, 2020. "Changes in foreign operation modes: A review and research agenda," International Business Review, Elsevier, vol. 29(1).
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    5. Floropoulos, Stylianos & Tsipouridou, Maria & Spathis, Charalambos, 2024. "Book-tax conformity and earnings management: A research agenda," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 54(C).
    6. Gavious, Ilanit & Livne, Gilad & Chen, Ester, 2022. "Does tax avoidance increase or decrease when tax enforcement is stronger? Evidence using CSR heterogeneity perspective," International Review of Financial Analysis, Elsevier, vol. 84(C).
    7. Steens, Bert & Roques, Thibaut & Gonnet, Sébastien & Beuselinck, Christof & Petutschnig, Matthias, 2022. "Transfer pricing comparables: Preferring a close neighbor over a far-away peer?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 47(C).
    8. Kohlhase, Saskia & Wielhouwer, Jacco L., 2023. "Tax and tariff planning through transfer prices: The role of the head office and business unit," Journal of Accounting and Economics, Elsevier, vol. 75(2).
    9. Moehrle, S. & Kozloski, T. & Meckfessel, M. & Reynolds-Moehrle, J. & Wen, H., 2018. "Developments in accounting regulation: A synthesis and annotated bibliography of evidence and commentary in the 2016 academic literature," Research in Accounting Regulation, Elsevier, vol. 30(1), pages 49-62.
    10. De Simone, Lisa & Klassen, Kenneth J. & Seidman, Jeri K., 2022. "The effect of income-shifting aggressiveness on corporate investment," Journal of Accounting and Economics, Elsevier, vol. 74(1).
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