The Effect of Changes in Income Shifting on Affiliate Managers' Internal Reporting Decisions†

• 成果类型: Article
• 署名作者: Klassen, Kenneth J.; Ruiz, Cinthia Valle
• 署名单位: University of Waterloo; IESEG School of Management
• 刊物名称: CONTEMPORARY ACCOUNTING RESEARCH
• ISSN/ISSBN: 0823-9150
• DOI: 10.1111/1911-3846.12783
• 发表日期: 2023
• 页码: 120-165
• 关键词: earnings management; MULTINATIONAL-CORPORATIONS; foreign multinationals; Performance evaluation; Investor protection; BONUS SCHEMES; tax; incentives; INFORMATION; QUALITY

摘要

This study examines the interplay between tax and internal reporting incentives among affiliates of multinational corporations (MNCs). MNCs face limited information flows that may prevent affiliates' performance metrics to be responsive immediately to changes in the firm's tax planning. Using granular data of affiliates belonging to MNCs from 21 European countries, our study provides new empirical evidence of affiliate internal reporting responses induced by changing tax plans. When high-tax-rate countries tighten income shifting rules, we first document that income shifting is reduced and low-tax-rate affiliates have less income. Second, we predict and document that managers of these low-tax-rate affiliates offset this decrease in profits by managing upwards a key performance metric: affiliate earnings. Our results are consistent with firms not quickly adjusting the affiliate managers' incentives in the face of changing tax planning strategies, and affiliates managing reported earnings to offset the effect of changes in the tax planning of the firm. Cross-sectional analyses provide further evidence consistent with the theory underlying the main tests. The results support the policy of tightening income shifting rules when the objective is to reduce income shifting, and firms' central management would benefit from considering the implications of changing tax plans on the assessment of local managers.