Using IRS Data to Identify Income Shifting to Foreign Affiliates

Using IRS Data to Identify Income Shifting to Foreign Affiliates

By
Lisa De Simone, Lillian Mills, Bridget Stomberg
Review of Accounting Studies.
2019, Vol. 24, Pages 694-730

Income shifting is a significant source of tax planning for U.S. corporations. We use confidential Internal Revenue Service (IRS) data to develop a firm-year measure of income shifting. Our measure captures the relative extent of U.S. multinational entity (MNE) net intercompany payments out of the U.S to CFCs. Our data show that the majority of sample firms report net inbound intercompany payments on average. Sample firms report nearly $830B of outbound payments and over $1T of inbound payments in total. Companies reporting net outbound payments are smaller and operate in high tech industries. Supplemental analyses show that firms with outbound intercompany payments have a lower rate of IRS audit, and are no more likely to be assessed additional taxes upon audit. Our study provides a measure based on publicly available data that researchers, investors, and policymakers can use to infer outbound income shifting.