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Academic Journal
Accounting

“Foreign Exchange Risk, Hedging, and Tax-Motivated Outbound Income Shifting”

Although outbound income shifting to low‐tax jurisdictions provides tax savings, it is often accompanied by nontax costs. In this study, I examine whether foreign exchange (FX) risk constrains tax‐motivated outbound income shifting by U.S. multinational corporations. My findings indicate that exposure to greater currency volatility is associated with less outbound income shifting, and this effect is stronger for firms with foreign affiliates using foreign functional currencies. I also investigate whether hedging facilitates outbound income shifting. Consistent with hedging lowering costs associated with exchange rate volatility, I find that U.S. firms that use more currency derivatives tend to shift more income to low‐tax foreign jurisdictions. Overall, these findings suggest that FX risk is an important cost of outbound income shifting.
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953-987 pages 2020 Wiley Junfang Deng View on: Google Scholar

Academic Journal
Accounting

“GAAP income and the AMT: The case for earnings management”

In this article, the authors examine the new federal Alternative Minimum Tax (AMT) taxes the largest US companies based on GAAP book income. This new law creates an incentive for companies to reduce their book income below their tax income to avoid paying the AMT. How does this action of intentionally reducing book income relate to the Business Judgement Rule? Other topics will be analyzed as well. This was submitted to "Tax Notes" and will be published in February 2024.

The paper contains an exciting analysis of NVIDIA and contains an "open letter" to the CEO of NVIDIA providing him advice on how to manage the AMT and increase NVIDIA's after-tax-cash-flow for the year 2023.
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J Gramlich Brandon Holbrook O Ola

Academic Journal
Accounting

“Income Shifting and U.S. International Trade in Goods Statistics”

Intrafirm trade represents greater than one-third of total U.S. international trade in goods. Since these are not arm’s-length transactions, trade policymakers have voiced concerns that income shifting may distort international trade in goods statistics through the manipulation of transfer prices. Using country-level data on intrafirm exports and imports, we estimate a path analysis that simultaneously tests how and to what extent tax-motivated transfer pricing and real investment decisions affect intrafirm trade in goods statistics. Contrary to speculation, we do not find an economically significant relation between transfer pricing and intrafirm trade in goods statistics. In contrast, we find that tax-motivated location decisions create a 21 (20) percent or $819.7 ($927.1) million difference in mean intrafirm exports (imports) between the U.S. and a low- and high-tax country. This study provides trade policymakers with relevant information about the extent to which real investment decisions and accounting manipulations affect intrafirm trade in goods statistics and contributes to the international trade and income shifting literatures.
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2021 Elsevier Junfang Deng Rick Laux View on: Google Scholar

Academic Journal
Accounting

“Information flows among rivals and corporate investment”

Using a novel pairwise measure of firms’ acquisition of rivals’ disclosures, we show that investment opportunities drive interfirm information flows. We find that these flows predict subsequent mergers and acquisitions as well as how and how much firms invest, relative to rivals. Moreover, firms’ use of rivals’ information often hinges on the similarities of their products. Our results suggest that rivals’ public information, far from being unusable, helps facilitate investment and product decisions, including acquisitions and product differentiation strategies. The findings also support a learning mechanism that could partly underlie the emerging literature on peer investment effects.
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760-779 pages 2020 Elsevier Terrence Blackburne Darren Bernard Jake Thornock View on: Google Scholar

Academic Journal
Accounting

“Proprietary Costs and the Reporting of Segment-level Tax Expense”

We examine whether proprietary costs of disclosure affect the reporting of segment-level tax expense. Current accounting rules for segment-level reporting afford managers significant discretion in what line items to report. We predict and find firms with higher proprietary costs of disclosure (i.e., higher tax avoidance) are less likely to disclose segment-level tax information. These results are stronger for firms that define business segments on a geographic basis, where disclosure could reveal tax expense information about specific tax jurisdictions, consistent with the proprietary cost hypothesis. Overall, our results suggest some managers potentially use discretion in current guidance to avoid segment-level disclosure of taxes when these disclosures have the potential to be detrimental to the firm.
Details

1-26 pages 2021 American Accounting Association Junfang Deng Logan Steele Dan Lynch Fabio Gaertner View on: Google Scholar