Does Parenting Matter? U.S. Parents, Non-U.S. Parents, and Global Firm Taxes

Eric J. Allen and Susan C. Morse

Journal of Law, Finance, and Accounting, 2019, vol. 4, issue 2, 239-290

Abstract: In this paper we examine whether, under pre-2018 tax law, a global firm reported a lower income tax expense simply because its publicly traded parent was incorporated outside the United States. Our study considers loss years as well as profit years and isolates the effect of the incorporation location of the parent by considering only U.S. and non-U.S. multi-national companies (MNCs) with a significant U.S. presence. We find that, in profit years, U.S. firms show an effective tax rate that is greater by 5 percentage points compared to non-U.S. firms. Conversely, in loss years, which make up approximately 30% of our sample, U.S. firms have better tax results, which can be expressed as an effective tax rate advantage of 4 percentage points among firms that do not record a valuation allowance. Our study demonstrates that the relative tax cost of organizing as a U.S. firm is smaller than some have suggested, and reinforces the importance of considering loss year results when evaluating tax policies. The results also suggest that the reduction in the U.S. corporate income tax rate under the 2017 Tax Cuts and Jobs Act, or TCJA, will provide smaller benefits to U.S.-parented corporations when loss years are also considered.

Keywords: Financial reporting; Taxation; International business: Multinational corporations (MNC) and enterprises (MNE); Public Economics: Public Finance; Accounting for Income Taxes; Multinational Taxation; U.S. and Non-U.S. Firms; Effective Tax Rates (search for similar items in EconPapers)
JEL-codes: H25 K34 M41 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:now:jnllfa:108.00000038

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