TAXES AND TRANSFER PRICING: INCOME SHIFTING AND THE VOLUME OF INTRA-FIRM TRANSFERS (MULTINATIONALS)

Taxing authorities have often alleged that multinationals shift income between different geographic regions to minimize global taxes. Prior research has found patterns of incomes reported and taxes paid that are consistent with this. However, these patterns are also consistent with firms using legitimate operational measures to influence the location of income. This dissertation attempts to discriminate between these alternate explanations by using data derived from the geographical segment disclosure in annual reports of firms about the volume of firms' inter-geographic area transfers. Firms with large amounts of intra-firm international transfers are hypothesized to have greater opportunities to shift income through the use of transfer prices.; The dissertation also examines whether the pattern of income shifting through transfer prices has changed subsequent to the Tax Reform Act of 1986. The Tax Reform Act, and the changes in the transfer pricing regulations that followed, considerably increased the scrutiny of international transfer prices by the IRS. However, the incentives for firms to use transfer prices to shift income also increased significantly because of the change in firms' foreign tax credit position in this period. This study examines which of these effects predominates by testing for income shifting in both periods.; The sample used is a randomly selected group of U.S. multinationals. The empirical results suggest indications of income shifting through transfer prices in both the pre-and the post-Tax Reform Act of 1986 periods. Firms with high volumes of inter-geographic area transfers are found to pay lower global taxes than other similar firms. Firms with high volumes of inter-geographic area transfers appear to have paid lower U.S. taxes than other similar firms prior to the Tax Reform Act of 1986 and higher U.S. taxes than these firms subsequent to it. This is consistent with the tax incentives in both periods. The profits reported in the U.S. and in the foreign region are also found to be suggestive of tax motivated income shifting through transfer prices. These results are robust to the use of different formulations for the variables.