Journal of Law, Finance, and Accounting > Vol 4 > Issue 2

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

Eric J. Allen, Leventhal School of Accounting, University of Southern California, USA, Eric.Allen@marshall.usc.edu , Susan C. Morse, University of Texas School of Law, USA, smorse@law.texas.edu
 
Suggested Citation
Eric J. Allen and Susan C. Morse (2019), "Does Parenting Matter? U.S. Parents, Non-U.S. Parents, and Global Firm Taxes", Journal of Law, Finance, and Accounting: Vol. 4: No. 2, pp 239-290. http://dx.doi.org/10.1561/108.00000038

Publication Date: 13 Dec 2019
© 2019 E. J. Allen and S. C. Morse
 
Subjects
Financial reporting,  Taxation,  International business,  Public economics
 
Keywords
JEL Codes: M41, H25, K34
Accounting for Income TaxesMultinational TaxationU.S. and Non-U.S. FirmsEffective Tax Rates
 

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In this article:
1. Introduction 
2. Background and Hypothesis Development 
3. Research Design 
4. Sample Construction and Test of Main Hypotheses 
5. Additional Analysis 
6. Conclusion 
7. Data Availability 
Appendix I: Numerical Illustration of 2017 Act Changes 
Appendix II: Representative Non-U.S. Firm and U.S. Firm Structures 
Appendix III: Creation of Balanced Sample 
References 

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.

DOI:10.1561/108.00000038