What Drives the Tax Avoidance Strategies Adopted by US MNEs?

375 Pages·2017·3.93 MB·English

UNIVERSITY OF READING
THE UNITED KINGDOM

What Drives the Tax Avoidance Strategies
Adopted by US MNEs?

Understanding the Heterogeneity of Approaches to
Corporate Tax Planning in US Multinational
Enterprises

THESIS SUBMITTED FOR THE DEGREE OF DOCTOR OF PHILOSOPHY

In The Henley Business School
International Business and Strategy

MAGGIE COOPER
1
DECLARATION

I confirm that this is my own work and the use of all material from other sources has been
properly and fully acknowledged.

Maggie Cooper

2
APPROVAL

NAME Maggie Cooper

DEGREE Doctor of Philosophy

TITLE OF THESIS What Drives the Tax Avoidance Strategies Adopted by US MNEs?
Understanding the Heterogeneity of Approaches to Corporate Tax
Planning in US Multinational Enterprises

SUPERVISORS Professor Mark Casson
First Supervisor
Dr. Quyen T.K. Nguyen
Second Supervisor

EXTERNAL EXAMINER INTERNAL EXAMINER
Prof. Jeremy Clegg Prof. Peter Miskell
Leeds University Business School Henley Business School

3
ACKNOWLEDGEMENTS

I could not have completed this PhD without the help and support I received from a lot of
different people for which I am very grateful.

The late Professor Alan Rugman believed in the importance of this topic for IB research and
helped me to get started in the right direction. I am also grateful for his support for the
research methodology that I have used.

My supervisor Professor Mark Casson always provided wisdom, ideas and encouragement.
He encouraged me to see the bigger picture. I would also like to thank him in particular, for
his help and time as he guided me through the statistical analysis.

I am very grateful to my supervisor Dr Quyen Nguyen. I would like to thank her for her
dedication, her unstinting attention to detail and for understanding all the arcane details of
the accounting side of tax. Thanks also for her optimism and encouragement which kept me
going whenever it got tough.

Special thanks to my friends and family for their support and the provision of coffee through
all of this. Thanks to Nick for all his encouragement as well as for all the long conversations
about tax. Thanks to Ellen and Iris for all their help and patience with me and thanks to my
Mum for her support and proof reading.

I am very grateful to the people who generously gave up their time to contribute to the
interview research. This research would have been impossible without their participation.

Finally, thanks to everyone in the department of International Business and Strategy at
Henley Business School who assisted and to Henley Business school itself for the financial
support.

Maggie Cooper

4
ABSTRACT
‘Beside the great issues of progress, sovereignty and economic justice that swirl around
the MNE, taxation sounds like a matter for petty minds that warm to accountancy. That
instinct is squarely wrong, because it turns out that arrangements for taxing corporate
net incomes constitute the dominant factor in the division of spoils between source and
host country’ Caves (1982).

In recent years tax avoidance has come under scrutiny from the public, the media and
the government. Tax planning is the way in which companies efficiently manage the
payment of taxes using a variety of methods to reduce tax legally. It is a key function of
multinational enterprises (MNEs), yet little is known about the way in which it is
implemented.

Internalization theory underpins the research contained in this thesis which argues
that early International Business (IB) theory had a more explicit focus on tax and the
opportunities that it confers on the MNE. Tax, it is argued, gives MNEs a financial
advantage over domestic companies. The development of IB theory more recently has
failed to build on this early understanding and consequently tax has become a neglected
topic within the field of IB.

This study aims to enhance our understanding of tax planning phenomena and the way
in which US MNEs are able to manage their Effective Tax Rate (ETR). It is an innovative
study, considering the importance of tax planning to the MNE as well as providing new
insight into the way in which tax planning is conducted within the MNE.

Mixed methods of qualitative and quantitative research are used in this study which
helps to examine the MNE’s tax planning in a holistic and systematic manner. This
includes in-depth and detailed analysis from the parent-firm level to the subsidiary-
level, and interviews with subsidiary managers and tax experts to obtain their insights
and views. Specifically, a series of interviews with senior tax executives from UK
subsidiaries of US MNEs and experts from tax advisory firms is conducted, focusing on
the experience of the MNE subsidiary operating in the UK. The study shows the
5
importance of the people within the business in terms of setting the tone for tax
planning and strategy and the risk that the organisation is prepared to take.

A quantitative study examines 94 large US MNEs from the group perspective. The
analysis uses two different measures of the ETR and a measure of the cash held by the
company to improve the understanding of the ways in which tax-planning strategies
are implemented. The analysis unpicks the impact of different characteristics of the
companies to add to our understanding of what drives the heterogeneity of approaches
in place.

A series of six case studies is used in the final section to reconcile the findings from the
two empirical studies – the interviews and the parent-level data analysis. Using
published accounting data and other company information (e.g. management
discussion, disclosure notes, and organizational structure and business configuration)
the case studies make a clear contribution by providing detailed analysis of the
companies involved over a ten year time horizon.
Key Findings and Contributions
This study makes a new key theoretical contribution by extending knowledge about the
motivations and abilities of MNEs to plan their tax affairs efficiently. Early work within
IB considered transfer pricing alone and this subject has then been neglected in recent
years. This study demonstrates that transfer pricing is only one part of the complex tax
(and tax planning) interactions between governments and MNEs. It highlights the need
to distinguish between the value appropriation (rent seeking) aspirations of MNEs,
which are the primary concern of governments, and the value creation (efficiency
based) internalization activities of MNEs as they use internal prices to overcome
exogenous market imperfections (Rugman, 1980). Furthermore, findings from the
interview research suggest the importance of aspects, such as the experience of the
individuals’ and the company’s overall attitude to risk that the development of theory
must take into account. This thesis reaffirms the centrality of financial planning (an in
particular tax planning) to internalization theory.

6
Early theoreticians could not test the economic models that they developed. The
quantitative research in this thesis builds an economic model which is then tested
empirically. The importance of the size of a firm, the use of intellectual property, the
use of small tax havens and the proportion of women on the board are found to be
important factors in determining the aggressiveness of the tax stance adopted by US
MNEs.

The findings from this research have important implications for policy makers by
providing new and useful insights into the way in which MNEs plan their tax strategies.
The research will also be of interest to managers within the firm, adding to their
understanding of the role of tax in corporate strategy.

7
Table of Contents
APPROVAL 3
ABSTRACT 5
KEY FINDINGS AND CONTRIBUTIONS 6
LIST OF TABLES 13
LIST OF FIGURES 15
LIST OF ABBREVIATIONS 16
GLOSSARY 18
1 INTRODUCTION 22
1.1 EXAMPLE: PROFIT SHIFTING 24
1.2 DEFINITIONS OF TAX AVOIDANCE AND TAX PLANNING 27
1.3 THE INTERNATIONAL TAX SYSTEM 29
1.4 THE US TAX SYSTEM 30
1.5 OVERVIEW OF RESEARCH 33
1.6 CONTRIBUTION OF THIS RESEARCH 34
1.7 STRUCTURE OF THIS RESEARCH 35
2 LITERATURE REVIEWS 38
2.1 THEORETICAL LITERATURE REVIEW 38
2.1.1 INTRODUCTION 38
2.1.2 LITERATURE SEARCH AND ANALYSIS 40
2.1.3 INTERNALIZATION THEORY AND THE MNE 45
2.1.4 MOTIVATION TO AVOID TAX 51
2.1.5 ADVANTAGES TO THE MNE FROM TRANSFER PRICING 53
2.1.6 EFFICIENCY AND GLOBAL WELFARE 59
2.1.7 DIFFICULTIES AFFECTING THE DEVELOPMENT OF IB RESEARCH ON TAXATION 63
2.1.8 CONCLUSIONS 65
2.2 EMPIRICAL LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT 67
2.2.1 INTRODUCTION 67
2.2.2 INHERENT DIFFICULTIES IN RESEARCHING THIS AREA 69
8
2.2.3 ASSESSING THE EXTENT OF PROFIT SHIFTING 70
2.2.4 TAX AVOIDANCE MECHANISMS 73
2.2.5 SIZE 74
2.2.6 TRANSFER PRICING 75
2.2.7 TOP MANAGEMENT TEAM 88
2.2.8 CORPORATE SOCIAL RESPONSIBILITY 91
2.2.9 THE DEGREE OF MULTINATIONALITY 93
2.2.10 LOCATION 94
2.2.11 LOSSES 100
2.2.12 PROFIT REPATRIATION (DIVIDEND PAYMENT) VERSUS CASH HOLDINGS 101
2.2.13 PROFITABILITY / INCOME 105
2.3 CONCLUSIONS AND AREAS FOR FUTURE RESEARCH 107
3 RESEARCH QUESTIONS AND METHODOLOGY 110
3.1 RESEARCH QUESTIONS 110
3.1.1 RESEARCH METHODS 111
3.2 INTERVIEWS 112
3.2.1 ETHICAL APPROVAL 115
3.2.2 IDENTIFYING INTERVIEWEES 116
3.2.3 INTERVIEW METHODOLOGY 116
3.2.4 INTERVIEW TECHNIQUE 119
3.3 QUANTITATIVE ANALYSIS 120
3.4 CASE STUDIES 121
3.5 CONCLUSION 127
4 INTERVIEWS WITH TAX EXECUTIVES 128
4.1 INTRODUCTION 128
4.2 KEY FINDINGS 131
4.3 EXTENT OF TAX PLANNING 131
4.4 REDUCTION IN AVOIDANCE SINCE 2008 134
4.5 WHAT DRIVES A COMPANY’S ADOPTED POSITION? 137
4.5.1 PEOPLE AND CULTURE 137
4.5.2 RISK 139
4.5.3 REPUTATION 142
4.5.4 PERSONAL RESPONSIBILITY AND PERSONAL REPUTATION 143
4.6 CASH MANAGEMENT 144
9
4.7 TAX AND CORPORATE STRATEGY 146
4.8 CORPORATE TAX DEPARTMENTS 149
4.9 TAX AVOIDANCE MECHANISMS 152
4.10 GOVERNMENT POLICIES 155
4.11 FINDINGS AND DISCUSSION 156
4.11.1 FRAMEWORK FOR COMPANY ANALYSIS 158
4.11.2 LIMITATIONS AND SUGGESTIONS FOR FUTURE RESEARCH 161
5 A STUDY OF DIFFERENT APPROACHES TO CORPORATE TAX PLANNING IN LARGE US
MULTINATIONAL ENTERPRISES: A QUANTITATIVE ANALYSIS 164
5.1 INTRODUCTION 164
5.2 CONCEPTUAL MODEL 165
5.3 INDEPENDENT VARIABLES 170
5.3.1 COMPANY SIZE 170
5.3.2 IP 171
5.3.3 ROLE OF WOMEN WITHIN THE COMPANY 172
5.3.4 CSR 173
5.3.5 THE DEGREE OF MULTINATIONALITY 174
5.3.6 TAX HAVENS 175
5.3.7 LOSSES 179
5.4 EFFECTIVE TAX RATES: DVS 180
5.5 RESEARCH DESIGN 185
5.6 DESCRIPTIVE STATISTICS 186
5.7 OVERALL REGRESSION RESULTS 192
5.7.1 HETEROSKEDASTICITY 193
5.7.2 TEST FOR NORMALITY 193
5.8 HYPOTHESIS TESTING RESULTS 195
5.8.1 SIZE 196
5.8.2 INTELLECTUAL PROPERTY 198
5.8.3 ROLE OF WOMEN ON THE BOARD 198
5.8.4 CSR 199
5.8.5 INTERNATIONALITY INDEX 200
5.8.6 TAX HAVENS 201
5.8.7 LOSSES 205
5.8.8 RESIDUALS ANALYSIS 205
5.9 CONCLUSION AND AREAS FOR FUTURE RESEARCH 206
10