In recent years, the phenomenon of income shifting by multinational corporations has attracted considerable attention from economists, policymakers, and tax authorities worldwide. Much of the research has traditionally focused on how U.S.-based multinational enterprises shift income abroad to minimize their global tax liabilities. However, a novel and critical perspective has emerged with the study led by Jim Albertus, an Assistant Professor of Finance at Carnegie Mellon University’s Tepper School of Business, which investigates the less explored area of foreign multinational firms shifting income out of the United States. His comprehensive empirical analysis draws upon a unique and confidential dataset, shedding light on the dynamics and implications of tax-motivated income shifting by foreign-owned U.S. subsidiaries.
Albertus’ study is a pioneering effort in addressing two significant challenges that have historically hampered research in this domain. Firstly, unlike domestic multinationals whose financial data are relatively accessible, firm-level information on the operations of foreign multinational subsidiaries within the U.S. has remained largely confidential and inaccessible to researchers. To overcome this, Albertus obtained data derived from mandatory surveys administered by the U.S. Bureau of Economic Analysis, forming a detailed panel dataset encompassing income statements and balance sheets of foreign-owned subsidiaries. This dataset offers an unprecedented lens to study the internal financial behaviors of these entities and their responses to tax policy changes.
Secondly, identifying causal effects in income shifting requires a source of variation in tax incentives that affect some firms but not others, thus providing a natural control group. Since U.S. tax policies apply uniformly across all firms domiciled or operating in the country, distinguishing effects through domestic law alone is problematic. Albertus navigated this by exploiting the staggered implementation of controlled foreign corporation (CFC) rules by the countries where these foreign multinationals are headquartered. This interjurisdictional variation creates differential incentives for income shifting and allows for comparative analysis, isolating how changes in foreign tax regimes influence the reporting and operational decisions of U.S. subsidiaries.
The study reveals that foreign multinational companies engage in a measurable, though modest, degree of tax-driven income shifting out of the United States. Crucially, the primary mechanism employed is transfer pricing—the pricing of intra-firm transactions involving goods, services, or intellectual property traded between the U.S. subsidiaries and their affiliated entities abroad. By adjusting transfer prices, firms effectively reallocate reported profits to lower-tax jurisdictions, thereby reducing their global tax burden. In contrast, the practice of earnings stripping, which involves the use of excessive intra-company debt financing to generate interest deductions and erode the U.S. tax base, appears to be relatively uncommon among foreign-owned U.S. firms.
Albertus’ findings also illuminate the economic consequences of income shifting beyond mere tax avoidance. The analysis indicates that when foreign governments adopt more stringent rules curbing income shifting, the associated U.S. subsidiaries display modest decreases in both investment and employment levels. This evidence suggests that aggressive income shifting strategies, while benefiting multinational firms by reducing tax payments, also contribute indirectly to sustaining jobs and capital formation within the United States. Therefore, restrictions on income shifting outside of the U.S. have tangible spillover effects on the domestic economy, albeit limited in scale.
The implications of these findings are timely and significant given the ongoing deliberations in the U.S. Congress regarding proposed legislative changes colloquially referred to as the "Revenge Tax." These provisions, expected to take effect following a tax bill potentially passed by June 2025, aim to counter foreign tax policies that enable multinational companies to erode the U.S. tax base. Albertus’ research offers a vital empirical foundation to inform policymakers about the scope and magnitude of income shifting by foreign multinationals and the potential economic trade-offs involved in combating such practices.
From a methodological standpoint, the study stands out for its rigorous data assembly and quasi-experimental design. The confidential panel dataset meticulously constructed from government surveys enables a granular view of the operations and financial reporting practices of foreign multinational subsidiaries, including revenue streams, costs, and asset holdings. By integrating this dataset with the timing of foreign countries’ CFC rule changes, the research leverages variation in external tax environments to identify causal relationships, circumventing the endogeneity issues that typically plague observational tax research.
An important nuance highlighted in the study is the heterogeneity across firm behaviors and country contexts. Not all foreign multinationals respond equally to tax incentives; firms headquartered in countries with more aggressive CFC rules are less inclined to engage in income shifting from their U.S. subsidiaries. Additionally, effects vary by industry, firm size, and the complexity of multinational corporate structures. Such heterogeneity cautions policymakers against one-size-fits-all regulatory approaches and underscores the need for coordinated international tax policies to effectively address profit shifting.
In terms of broader economic impact, Albertus’ research contributes to the discourse on the interconnectedness of global tax policy and investment flows. The findings reinforce that U.S. economic interests have a somewhat insulated position—while foreign tax policies do influence the behavior of U.S. subsidiaries, the degree of sensitivity is moderate. This limited exposure suggests that while international tax competition matters, the U.S. economy’s attractiveness for foreign direct investment is supported by a diverse set of factors beyond tax considerations alone, such as market size, infrastructure, legal frameworks, and technological capabilities.
Moreover, the study pushes the envelope in advancing our understanding of how multinational firms strategically manage their tax liabilities across borders. Income shifting, as demonstrated, is not solely about evading taxes but also relates to optimizing the allocation of resources, investment decisions, and employment. These findings complicate the traditional narrative of income shifting as purely detrimental, illustrating a more nuanced interplay between tax policy, corporate behavior, and economic outcomes.
The empirical insights combined with theoretical implications make this study a critical addition to the literature on international corporate taxation and global business strategy. Albertus’ work invites future research to further disentangle the microeconomic mechanisms underpinning income shifting and to evaluate the long-term consequences of evolving international tax frameworks, particularly in light of ongoing reforms spearheaded by organizations such as the OECD and the G20.
Financial backing for this research was provided by New York University’s Stern Center for Global Economy and Business, reflecting the importance and timeliness of exploring the intersection between taxation, multinational firm behavior, and economic policy. The rigorous approach and timely findings render the study essential reading for academics, tax authorities, and policymakers striving to develop informed and effective responses to the challenges posed by global profit shifting.
As legislative bodies worldwide strive to curtail base erosion and profit shifting (BEPS), understanding the nuanced behavior of foreign multinational subsidiaries operating within the United States becomes ever more critical. Albertus’ analysis equips scholars and policymakers with evidence-based knowledge, fostering a more sophisticated dialogue about the costs and benefits of various tax regimes in an increasingly interconnected economic landscape.
By unveiling the modest but meaningful degree to which foreign multinationals reshape their U.S. income reports for tax advantages, and the consequential ripple effects on employment and investment, this research paves the way for more comprehensive and targeted tax policy interventions. It underscores the need for coordinated international efforts to confront transnational tax avoidance strategies while balancing economic vitality within host countries.
Overall, Jim Albertus’ study emerges as a landmark contribution, using innovative data and methodological rigor to illuminate a critical frontier in economic research. As foreign-controlled firms continue to play a prominent role in the U.S. economy, appreciating the complexity and implications of their tax-driven behaviors will remain paramount for policymaking in the foreseeable future.
Subject of Research: Income shifting and tax-motivated financial behavior of foreign multinational firms operating in the United States.
Article Title: Income Shifting out of the United States by Foreign Multinational Firms
News Publication Date: 9-Apr-2025
Web References:
https://academic.oup.com/rfs/advance-article/doi/10.1093/rfs/hhaf021/8109649
http://dx.doi.org/10.1093/rfs/hhaf021
Keywords: Corporations, Business, Income inequality, Economics, Economics research, Finance, Macroeconomics
