Tax-Motivated Income Shifting by Multinationals under a Worldwide Tax System: Evidence from Korea

Abstract

This study first provides the empirical evidence on tax-motivated income shifting by multinationals under a worldwide tax system at the subsidiary level. Using subsidiary-specific data of Korean multinationals during 2006-2015, I find that multinationals subject to a worldwide tax regime shift income out of a parent country to low corporate tax rate countries to reduce their worldwide tax burden, consistent with regulators concerns about international tax avoidance. In addition, I find that the parent-country outward income shifting has decreased after the adoption of International Financial Reporting Standards (IFRS). But the parent-country outward income shifting is not affected by the Base Erosion and Profit Shifting (BEPS) package for curbing the international tax avoidance. Furthermore, I show that multinationals utilize intercompany capital transactions with their foreign subsidiaries as a means of international income shifting.