|Allen, Eric J., Morse, Susan C.|
Multinational corporations (MNCs) face the challenge of, and opportunity for, multijurisdictional tax planning (Desai and Dharmapala, 2010; Desai, 2009). One primary goal of multijurisdictional planning is to allocate as much taxable income as possible to low-tax jurisdictions, thereby minimizing corporate income tax (Clausing, 2009). While all MNCs have the opportunity to take advantage of this strategy, MNCs with parent corporations incorporated outside
This paper considers the issue of the incorporation location choice of firms that conduct initial public offerings (IPOs) on U.S. markets. Specifically, it examines whether U.S.-headquartered MNCs incorporate in tax havens prior to an IPO. We first consider the hypothesis that U.S.-headquartered MNCs incorporate parent corporations in tax-haven jurisdictions, and find that they rarely do so. In particular, only 27 firms, or about 3 percent of the 918 U.S.-headquartered MNCs that we identify, incorporate in tax havens. We also briefly consider the possibility that U.S.-headquartered MNCs may incorporate in non-U.S., non-tax-haven jurisdictions and find only minimal evidence of this practice in our sample. We next consider whether U.S.-headquartered firms are responsible for the previously documented increase in the proportion of firms conducting U.S. IPOs that are incorporated in tax havens (Desai and Dharmapala, 2010). We find that firms headquartered in
Section II discusses the different incorporation options for MNCs and the associated costs and benefits. Section III documents our study design, and section IV our results. Section V concludes.
II. U.S.-HEADQUARTERED MNCs' INCORPORATION DECISIONS
A. U.S. versus Tax Haven Incorporation
A U.S.-headquartered MNC faces the choice of whether to incorporate its parent entity in
We begin by discussing the existing laws and incentives that affect U.S.-headquartered, U. S.-incorporated firms and U. S .-headquartered, tax-haven-incorporated firms. We then consider the possibility that incentives to incorporate a tax haven parent have changed or will change over time. Finally, we discuss several non-tax considerations relevant to incorporation decisions.
B. Tax Structure Options for U.S.-Headquartered MNCs
1. Taxation of MNCs with U.S. Parent
Corporations incorporated in
Like all taxpayers, U.S-parented MNCs face an incentive to engage in tax planning to reduce or defer the amount of U.S. and non-U.S. tax they have to pay. International tax planning differs significantly from firm to firm. However, a typical structure for a U.S.-parented MNC features a U.S. parent corporation, with one or more non-U.S. intermediate holding corporations incorporated in a tax haven or other low-tax jurisdiction, which are owned by
U.S.-parented MNCs may take advantage of this type of structure by using transfer pricing to construct intercompany transactions in a way that allocates income to the low-tax intermediate holding corporation(s) rather than to
U.S.-parented MNCs may also use foreign-tax-credit planning to ensure that their repatriations are sheltered from taxation. For example, they may choose to pay dividends from high-taxed rather than low-taxed subsidiaries, generating higher deemed paid foreign taxes. This strategy can shield both dividends and payments other than dividends, such as royalties, from non-U.S. tax (Grubert and Altshuler, 2008). Such MNCs may also use structures that maximize benefits under bilateral income tax treaties and non-U.S. tax laws and ensure that intercompany payments such as royalties and interest are not subject to non-U.S. withholding tax and/or are deductible under non-U.S. income tax law. In addition, alternatives to dividend repatriation, including intercompany loans and "blending" dividends from high-tax and low-tax affiliates, are correlated with the prospect of a high tax liability imposed on dividend repatriation (Altshuler and Grubert, 2002).
As a result of this planning, prior research finds that U.S.-parented MNCs pay low rates of U.S. tax on non-U.S. income earned in non-U.S. subsidiaries. For example, in 2007, U.S.-parented MNCs paid about
Grubert and Mutti (2001) develop a broader model that calculates the U.S. tax burden on non-U.S. income in U.S.-parented MNC structures including not only taxes remitted but also "excess burden," or deadweight loss. Using this model, based in part on 1992 Treasury tax return data, Altshuler and Grubert (2001) estimate that the effective U.S. tax rate for the non-U.S. income of U.S.-parented MNCs is approximately 5.4 percent. This estimate includes a 1.7 percent "excess burden" deadweight loss generated by unrepatriated earnings in non-U.S. jurisdictions with an effective tax rate below 10 percent, a result that is consistent with other research (Desai, Foley, and Hines, 2001). Grubert and Altshuler (2008) have also raised the possibility that the "implicit costs of deferral" may be greater than 1.7 percent for some firms.
Several costs contribute to the excess burden or deadweight loss of sequestering earnings offshore. For example, lower than optimal dividend payments may limit the ways in which earnings may be invested (Desai, Foley, and Hines, 2001). Additionally, maintaining non-business assets offshore may increase a firm's cost of capital (Bryant-Kutcher, Eiler, and Guenther, 2008). Finally, the firm directly incurs tax planning costs including the expense of creating an offshore structure and maintaining multiple affiliates and intercompany relationships and payments (Slemrod and Blumenthal, 1996).
2. Taxation of MNCs with Tax-Haven Parent
An alternative structure features a MNC headquartered in
As mentioned earlier, a U.S.-parented MNC may attempt to allocate not only non-U.S. income, but also U.S. income, to low-taxed non-U.S. subsidiaries (Clausing, 2009; Grubert, 2012). This allocation may lessen the value of tax-haven incorporation. However, tax-haven-parented firms, at least in some cases, have an advantage with respect to this kind of tax planning. Seida and Wempe (2004) and Desai and Hines (2002) suggest that a key benefit of a successful tax-haven-parented MNC structure is the use of earnings-stripping strategies, under which a U.S. subsidiary makes deductible interest or other payments to its tax-haven parent to reduce the amount of income subject to U.S. tax. In other words, a tax-haven-parented MNC structure may facilitate the reduction of tax on U.S. income compared to a U.S.-parented MNC structure. In recognition of this issue, a perennial U.S. legislative proposal would tighten anti-earnings-stripping rules for tax-haven-parented MNCs created in inversion transactions (Solomon, 2012).
Prior research provides some evidence of the benefits provided by the tax-haven-parented structure. Seida and Wempe (2004) find evidence that earnings stripping by U.S. firms that inverted into tax-haven-parented structures, prior to the enactment of the 2004 anti-inversion rules, resulted in lower post-inversion effective tax rates for the inverted firms compared to a control sample. Cloyd, Mills, and Weaver (2003) find no systematic increase in company valuation following the announcement of an inversion, but Desai and Hines (2002) observe that the markets exhibit more positive reactions to inversions in the presence of greater leverage. The research suggests that a tax-haven-parented structure provides tangible tax savings to some firms, which investors positively value.
Changing from a U.S.-parent to a tax-haven-parent structure is costly, as the applicable rules typically require shareholders to recognize gain (but prevent the recognition of loss) upon such an inversion (Treasury, 2002). Moreover, such a change is sometimes impossible. Under Section 7874 of the Internal Revenue Code, an anti-inversion provision enacted in 2004, a MNC is still treated as a U.S.-parented firm even after acquisition by a foreign corporation if: (1) at least 80 percent of the foreign corporation's stock is owned by former owners of the U.S. parent (by reason of their former ownership of the U.S. parent); and (2) the firm lacks "substantial business activities" in the country in which the new foreign parent is incorporated (Vanderwolk, 2010). Strategic acquisitions continue to provide a path to inversion (
C. Increasing Tax-Haven Incorporation Incentives?
The differences between the federal taxation of U.S.-parented and tax-haven-parented MNCs are not new. But it has been argued that, over time, the differences have become more likely to lead to U.S.-headquartered MNCs opting for tax-haven parents, including at the time of initial incorporation (Desai and Dharmapala, 2010; Shaviro, 2011). One reason is the asserted increased ease, attributable to communications and other technological developments, of "decentering" companies, or placing financial, organizational, and managerial "homes" in different countries (Desai, 2009, p. 1277). Another reason cited for an increased incentive for MNCs to incorporate outside
Another reform proposal would change the U.S. corporate income tax system to implement worldwide consolidation, or the current taxation of U.S.-parented MNCs on all of the income generated by non-U.S. subsidiaries (Kleinbard, 2011b), or at least on the income generated by low-taxed non-U.S. subsidiaries (
However, there is also the risk that future tax laws may make tax-haven incorporation less desirable. For example, passage of a "managed and controlled" test for determining corporate residence could significantly undermine the strategy of tax-haven incorporation (Kleinbard, 2011 b). Alternatively, rules directed specifically at low-taxed parents of U.S. subsidiaries could undo much of the benefit of, for example, earnings-stripping planning (Solomon, 2012). That said, a tax-haven-parented MNC could presumably domesticate and change into a U.S.-parented MNC if it concluded that the tax-haven-parented structure no longer offered sufficient advantages.
D. Non-tax Considerations
Non-tax incentives, most importantly capital markets and related corporate governance concerns, can also affect a firm's choice of country of incorporation. Non-U.S. incorporation does not offer the benefit of access to
More specific regulatory concerns may also play a role. Certain regulations, like those applicable to the airline industry, may favor U.S.-incorporated firms (Dobson and McKinney, 2009). On the other hand, incorporation outside
These non-tax considerations, together with opportunities for U.S.-incorporated firms to reduce U.S. tax under existing law, may affect the expected benefits of tax-haven incorporation for some firms. However, as pointed out in other research (Desai and Dharmapala, 2010; Shaviro, 2011), tax-haven incorporation still appears to offer many firms the prospect of avoiding a small current U.S. tax on non-U.S. income and the possibility of eroding the U.S. tax base through earnings-stripping strategies. The question we engage is whether firms are taking advantage of this option.
III. STUDY DESIGN
As discussed above, U.S. tax rules may encourage a U.S.-headquartered MNC to adopt a tax-haven-parented structure. But to what extent have U.S.-headquartered MNCs in fact used tax-haven-parented structures, and has their use of these structures changed over time? These questions motivate our study. We seek to test two hypotheses. First, do U.S.-headquartered MNCs incorporate in tax havens prior to an IPO? Second, are U.S.-headquartered firms responsible for the previously documented increase in the proportion of firms conducting U.S. IPOs that are incorporated in tax havens?
B. Use of IPO Data to Study Incorporation Location Decision
Our study examines firms that conducted IPOs on U.S.-based exchanges between 1997 and 2010. We choose this set of firms because: (1) it has been previously cited as support for the proposition that more U.S.-headquartered MNCs have begun to incorporate outside
Selection bias affects our sample to a limited extent. First, our sample excludes firms that do not conduct an IPO. Therefore we are unable to observe the incorporation decisions of firms who fail, are acquired prior to listing, or remain private. We have little reason to think that firms that fail or experience a strategic acquisition are more likely to choose tax-haven incorporation compared to firms that conduct an IPO. But it is possible that that a firm that plans to stay private may be more likely to choose tax-haven incorporation compared to firms that conduct an IPO. For example, it is possible that corporate governance and shareholders' rights offered by U.S. incorporation are more important for shareholders of a publicly held corporation than for owners of a closely held firm.
A second source of potential bias is that, although our sample includes firms that conduct an IPO on a U.S. exchange simultaneously with an offering on a non-U.S. exchange, we do not examine the incorporation decisions of firms that do not list on a U.S. exchange. There has been a significant drop in IPOs conducted on U.S. exchanges in recent years, and a concurrent increase on non-U.S. exchanges. If this dynamic is driven by U.S.-headquartered firms conducting their IPO on foreign markets, and these firms incorporate in tax havens, then our analysis would undercount the number of
U.S.-headquartered firms that incorporate in tax havens. In concurrent research, Doidge, Karolyi, and Stultz (2012) examine the drivers of the growth of IPOs outside of the U.S. They show that the number of firms conducting an IPO only outside of their domestic market has grown from 55 in 1990 to 734 in 2007, with the associated proceeds increasing from
A final limitation with our study design is that each observation in our data set typically relates to an incorporation decision taken several years prior to the IPO date and therefore lags incorporation decisions made in response to historical developments. As a result, any decisions made in response to legislative changes in the recent past will most likely not be reflected in the data. For example, the observations of U.S-headquartered, tax-haven-incorporated firms are composed mainly of firms that incorporated prior to the 2004 enactment of
C. Default Incorporation Jurisdiction Assumption
Others have identified the challenge of identifying the counterfactual case of those firms that would have incorporated in
To build our sample, we collect a listing of all initial public offerings on a stock exchange in
Panel C shows our identification of U.S.-headquartered MNCs. We use information provided by the 2011 Compustat fundamentals annual database to find evidence of foreign operations. Table 1, panel C documents this process. Of the 2,622 U.S.-headquartered IPO firms, we find 918 firms that show evidence of global operations. We code a firm with the selected screens equal to "missing" as purely domestic. As it is likely that at least some of the "missing" firms have foreign revenues, but do not specifically break out geographic information in their segment disclosures, we are likely undercounting the true number of MNCs.
Our results are divided into three sections. First, we report the frequency with which U.S.-headquartered MNCs in our data set incorporate in tax-haven jurisdictions. We consider a firm to be incorporated in a tax haven if the incorporation country is classified as such by Dharmapala and Hines (2009). (3) We also show descriptive data comparing U.S.-headquartered MNCs with tax-haven-incorporated parents to U.S.-headquartered MNCs with U.S.-incorporated parents. Second, we examine the previously noted increase of U.S.-listed IPO firms incorporating in tax havens (Desai and Dharmapala, 2010), and document where the firms driving this increase are headquartered. Finally, we list and describe the characteristics of the U.S.-headquartered firms that we find are important in the decision to incorporate in a tax-haven jurisdiction.
B. U.S.-Headquartered MNCs Overwhelmingly Incorporate in
In this paper, we generally consider U.S.-headquartered firms' incorporation decisions as a binary choice between U.S. incorporation and tax-haven incorporation. A third choice, non-U.S., non-tax-haven incorporation, is also an option. Some anecdotal evidence of recent examples of the approach of non-U.S., non-tax-haven incorporation exists (Webber, 2011). Before turning to
Table 2 presents the results. Of the 918 identified U.S.-headquartered MNCs in the sample, 44 incorporate outside
We focus the remainder of our analysis on the choice between tax-haven and U.S. incorporation. This focus not only includes the majority of non-U.S. incorporation location choices made by U.S.-headquartered MNCs, but also responds directly to the prediction of an increase in U.S.-headquartered, tax-haven-incorporated firms as a result of onerous U.S. federal income tax rules (Desai and Dharmapala, 2010; Shaviro, 2011). Table 3 shows the number of MNCs headquartered in
In some years, the percentage of tax-haven-incorporated firms is higher. For example, it is 16 percent in 2002 and 9 percent in 2009. However, in both of those years, the absolute number of tax-haven firms is only three and two, respectively. The higher percentage in those years reflects the low number of total IPOs as opposed to an increase in the occurrence of U.S. MNCs incorporating in tax havens. The results indicate that U.S.-headquartered MNCs have not made the decision to incorporate in tax havens prior to an IPO in significant numbers.
As noted in Panel C of Table 1, of the 918 multinational, U.S.-headquartered IPO firms that we identify, 588 have sufficient information about non-U.S. income to permit a comparison of the financial characteristics of different firms. In keeping with our binary comparison, we focus on a subsample of 575 firms that are incorporated either in a tax haven or in
Finally, the tax-haven incorporated firms have a higher ratio of foreign income to total income (FORINC of 0.64 versus 0.23). This suggests that the U.S.-headquartered firms that incorporate in tax havens are the firms that expect to realize relatively larger benefits from the reduction of U.S. tax on their non-U.S., and perhaps also their U.S., income. However, the results also show that U.S.-incorporated MNCs still exhibit material foreign operations (FORINC of 0.23) which indicates that there may be a substantial number of U.S.-headquartered firms that could reap some tax benefits from incorporating in a tax haven, yet do not make that choice.
C. Chinese- and Hong Kong-Headquartered Firms Drive Increase in Tax-Haven-Incorporation Trend
We next examine the hypothesis that U.S.-headquartered firms are responsible for the previously documented increase in the proportion of firms conducting U.S. IPOs that are incorporated in tax havens (Desai and Dharmapala, 2010). We use the larger sample of all U.S. IPOs from 1997-2010, as shown in panel A of Table 1, to consider this question. The use of the larger sample, not screened for evidence of multinational activity, is consistent with the approach in Desai and Dharmapala.
Table 5 provides a breakdown of the U.S. IPO firms that incorporate in tax havens. We find that Chinese-, Greek-, and
Figure 1 duplicates the results obtained by Desai and Dharmapala (2010) and shows that the proportion of U.S. IPO firms incorporated in tax havens increased dramatically around 2002. But, as Figure 1 also shows, the frequency of U.S.-headquartered firms incorporating in tax havens has increased only slightly over our sample period. Chinese-and
The finding that Chinese- and
[FIGURE 1 OMITTED]
Tax considerations may also play a role. First, the tax savings attributable to tax havens' low or zero corporate tax rates increases the likelihood of tax-haven incorporation rather than incorporation in the U.S. or other countries. Domestic tax issues may also have relevance. Prior to the repeal of Chinese foreign direct investment incentives in 2007, Chinese investors had an incentive to "round-trip" their capital into
With the above discussion we are not attempting to conclusively answer the question as to why Chinese- and
D. U.S.-Headquartered, Tax-Haven-Incorporated Firms
We identify 47 U.S.-headquartered, tax-haven-incorporated firms in our larger sample of 2,911 MNCs. (6) Table 6 lists these firms. In each case, a number of tax and non-tax decisions could have influenced the tax-haven-incorporation decision. We do not claim that tax considerations were the predominant driver for any of these firms' incorporation decision. Rather, we propose that the existence of these 47 firms leaves open the possibility that tax advantages of tax-haven incorporation may be influential factors in incorporation decisions for at least some firms. Of these 47 firms, 17 incorporated in, or after, 2004, the year in which the U.S. enacted stringent anti-inversion legislation.
First, we observe a tendency of U.S.-headquartered corporations in particular lines of business, such as insurance or marine transportation, to incorporate in tax-haven locations. Of the 47 firms, 13 are insurance carriers, and four are engaged in marine transportation. For both of these industries, specific and favorable tax provisions suggest that corporate tax incentives provide some of the reasons for firms' choice of tax-haven-parented structures.
In the case of insurance, it is possible for a tax-haven parent to minimize taxation on passive portfolio income such as interest and dividends, in part because of the low or zero tax-haven rate. A tax-haven parent may also avoid having any business income taxed by
Shipping companies with tax-haven parents can take advantage of a different provision of U.S. law, which exempts income from the international operation of a ship from U.S. income tax if earned by a foreign corporation resident in a country that declines to tax similar income earned by U.S. corporations (Glicklich and Miller, 2012). Regulatory reasons may also encourage the use of non-U.S. shipping flags for certain types of shipping businesses. U.S. statutory law limits some commerce, such as "coastwise" shipping between two U.S. ports, to U.S.-flagged vessels. For commerce not so limited, non-U.S. registration may provide an advantage for non-tax regulatory reasons including possible avoidance of applicable labor regulations, union contracts, and requirements to use U.S. shipyards for vessel construction (Semenoro, 2000) as well as avoiding exposure to the choice of law doctrine that may require a U.S. forum in the event of worker injury for a U.S.-registered ship (Gilmore and Black, 1975).
Other companies, not in the insurance or shipping industries, appear to have made an internal decision to incorporate in tax havens. These include
Finally, several of the companies we study conducted IPOs after a going-private transaction previously established a tax-haven parent. These include
There are at least two interesting aspects of the market participant story. First, it is possible that some market participants have specific interests or priorities that encourage tax-haven incorporation. Private equity firms might prioritize tax savings over corporate governance protections, for example. Second, if the decision to incorporate in a tax haven is mediated by communities of market participants, or their advisors that share advice and norms and imitate structures, this may affect how a change in behavior might come about. For example, a change in U.S.-based startups' incorporation decisions may gather momentum quickly if an influential group of investors or advisors concludes that the default jurisdiction of incorporation for U.S. startups should be outside
Using data on firms conducting IPOs in
Second, we test the hypothesis, suggested in Desai and Dharmapala (2010), that a recent increase in the proportion of U.S. IPO firms incorporated in tax havens shows that U.S.-headquartered firms have increasingly begun to incorporate in tax havens. To test this second hypothesis, we use a larger sample of 2,911 firms. We find that the proportion of firms conducting IPOs in
Future research might focus on providing a better idea of how firms make incorporation location decisions. In particular, better defining how capital formation and home or host country corporate governance and regulatory regimes impact the choice of incorporation would help provide a better framework for evaluating how tax regimes influence incorporation location choice. Additionally, studying institutional factors, such as the variance of incorporation location choice cross-sectionally across industries, may help predict how firms will respond to changes in tax or other rules.
ACKNOWLEDGMENTS AND DISCLAIMERS
Many thanks for helpful comments to editors
Altshuler, Rosanne, and
Altshuler, Rosanne, and
Altshuler, Rosanne, and
Bebchuk, Lucian A., and
Brauner, Yariv, 2008. "Value in the Eye of the Beholder: The Valuation of Intangibles for Transfer Pricing Purposes." Virginia Tax Review 28 (1), 79-164.
Clausing, Kimberly A., 2009. "Multinational Firm Tax Avoidance and Tax Policy."
Costa, Melissa, and
Daines, Robert, 2002. "The Incorporation Choices of IPO Firms."
Desai, Mihir A., 2009. "The Decentering of the Global Firm." The World Economy 32 (9), 1271-1290.
Desai, Mihir A., and
Desai, Mihir A.,
Desai, Mihir A., and
Dharmapala, Dhammika, and
Donmoyer, Ryan, 1999. "Multinationals Beg Finance to Simplify International Laws." Tax Notes 82 (11), 1539-1540.
Elliott, William E, 2005. "A Guide to Captive Insurance Companies."
Fleischer, Victor, and
Gilmore, Grant, Jr., and
Glicklich, Peter A., and
Grubert, Harry, 2012. "Foreign Taxes and the Growing Share of U.S. Multinational Company Income Abroad: Profits, Not Sales, are Being Globalized."
Grubert, Harry, and
Grubert, Harry, and
Hanlon, Michelle, and
Hines Jr., James R., and
Isenbergh, Joseph, 2009. International Taxation, 3rd edition.
Kane, Mitchell A., and
Kleinbard, Edward D., 201 la. "Stateless Income." Florida Tax Review 11 (9), 699-774.
Kleinbard, Edward D., 2011 b. "The Lessons of Stateless Income." Tax Law Review 65 (1), 99-171.
Li, Jinyan, 2007. "The Rise and Fall of Chinese Tax Incentives and Implications for International Tax Debates." Florida Tax Review 8 (7), 669-712.
Litvak, Kate, 2007. "The Effect of the Sarbanes-Oxley Act on Non-U.S. Companies Cross-Listed in the U.S."
Nadal, Lisa, 2009. "New Regulations Likely to Deter Use of Cost-Sharing Arrangements." Tax Notes' 122 (2), 191-193.
Roin, Julie, 2008. "Can the Income Tax Be Saved? The Promise and Pitfalls of Adopting Worldwide Formulary Apportionment." Tax Law Review 61 (3), 169-240.
Samuels, John M., 2009. "American Tax Isolationism." Tax Notes 123 (13), 1593-1599.
Seida, Jim A., and
Semenoro, Timothy, 2000. "The State of Our Seafaring Nation: What Course Has Congress Laid for the U.S. Maritime Industry."
Shaviro, Daniel, 2011. "The Rising Tax Electivity of U.S. Corporate Residence." Tax Law Review 64 (3), 377-430.
Shay, Stephen E., 2004. "Exploring Alternatives to Subpart F." Taxes 82 (3), 29-38.
Slemrod, Joel, and
Solomon, Eric, 2012. "Corporate Inversions: A Symptom of Larger Tax System Problems." Tax Notes 136 (12), 1449-1457.
Sullivan, Martin A., 201 I. Corporate Tax Reform: Taxing Profits in the 2 U Century. Apress,
Webber, Stuart, 2011. "Inverted U.S. Firms Relocate Headquarters to
(1) To provide additional evidence that U.S.-headquartered firms generally list on U.S. exchanges, we examined all firms that appear on the Compustat Fundamentals Annual (listed on North American Exchanges) and Global (international exchanges) databases for the sample period of 1997-2010. We identified all firms coded as U.S.-headquartered in the two databases (5,665 firms) and observed that 99 percent (5,622 firms) are, according to the databases, listed on an exchange (item EXCHG for fundamentals annual, EXCHC for global) located in
(2) The SDC "Nation" coding generally simply refers to the principal executive office listing on the face of the registration statement, which may not reflect a firm's strongest business nexus. Of the 302 non-U.S.-incorporated firms for which we hand-collected principal executive office data, 277, or 92 percent, listed a principal executive office country that was the same as the SDC "Nation" code.
(3) The Dharmapala and Hines list represents the consolidation of two different lists, one from Hines and Rice (1994) and one from an OECD (2000) report. A firm is classified as being incorporated in a tax haven jurisdiction if the 2-digit country code corresponds to a country listed as a tax haven (Dharmapala and Hines, 2009). These countries are:
(4) We obtain similar figures when we consider the total sample of U.S.-headquartered firms without control ling for MNC status: only 69 firms, or 2.6 percent of the larger sample, incorporate outside
(5) We also find that Chinese and
(6) Largely because of missing data fields, not all of these 47 firms appear in our subsample of 918 U.S.-headquartered multinational firms. We manually collect incorporation year data for these 47 firms from publicly available documents.
Sample ConstructionPanel A: Total Sample Total U.S. IPOs, between 1997-2010, from SDC 3,939 Less: Non-original IPOs -55 Duplicate entries -18 Firms for which we could not obtain the country -259 of incorporation SIC code filters: 6000-6199: Depository and non-depository credit -144 institutions 6722: Open-end management investment offices -2 6726: Closed-end management investment offices -420 6798: Real estate investment funds -107 6799: Other investors -23 Initial sample 2,911 Panel B: Construction of U.S.-headquartered Sample Total U.S.-headquartered Firms per SDC Coding 2,587 Added from review of prospectuses: Principal executive office listed = U.S. 1 More than 50% U.S. revenue 24 More than 50% floor area in U.S. 9 More than 50% U.S. employees 1 Total U.S.-headquartered Firms 2,622 Panel C: Constructions of U.S.-headquartered MNC Sample Total U.S.-headquartered Firms 2,622 Number that could be Identified in Compustat 2,465 U.S.-headquartered Firms with Non-missing, Non-zero Amounts in the Year of IPO or any of the Subsequent Three Years: Pre-tax foreign income 588 Foreign deferred taxes 127 Foreign income tax expense 203 Total U.S.-headquartered Multinational Companies 918 Sample Construction Notes: Firms identified as U.S.-headquartered MNCs in Panel C are used for the analysis in Table 2. Firms identified as U.S.-headquartered MNCs in Panel C and that also provide information regarding pre-tax foreign income (PIFO) and total pre-tax income (PI) are segregated for the analysis in Table 4. Sources: Panel A: We obtain a listing of all Initial public offerings in the United Statesfrom the Thomson Financial Services Database ( Securities Data Company(SDC)) between 1997 and 2010. This results in 3,939 offerings. From SDC we obtain the firm name, issue date, SIC code, country of incorporation (item "Country of Incorporation" or "State of Incorporation"), and headquarters country (item "Nation"). We eliminate all offerings which were not the firms' initial IPO (SDC category "Original IPO" equal to "No"), as well as 18 offerings that are duplicated in the database. We note 899 offerings that are missing the country of incorporation in SDC. For these offerings we manually review the firms' prospectus (i.e. form S-1, F-1, S-11, N-2, etc.) to collect the country of incorporation at the time of offering. We obtain this information for all but 259 of the offerings. We also eliminate all depository and non-depository credit institutions (SIC Codes 600045199), real estate investment trusts (6798), closed-end management investment offices (6726), open-end management investment offices (6722), and other investors (6799). This leaves us with 2,911 firms with the countries of headquarters and incorporation identified. Panel B: We note that SDC typically uses the address given by the firm as the principal executive office to determine the headquarters country. To expand the definition of U.S.-headquartered firms, we review the prospectuses for all 324 firms not incorporated in the United Statesto find evidence that the firm is effectively domiciled in the United States. We apply four screens to make this determination: (1) address of the principal executive office; (2) percentage of employees located in the United States; (3) percentage of floor area located in the United Statesthe United States. For the last three screens, if the percentage is greater than 50%, we code the firm as having a headquarters in the United States. This results in coding an additional 35 firms as U.S.-headquartered. Panel C: We use the firm's CUSIP number from SDC to obtain the GVKEY from the 2011 version of the Compustat fundamentals annual database. For firms that could not be identified in this manner we collect the CIK number from the SEC'sEDGAR database and use it to identify the GVKEY in Compustat. For each firm we obtain the ending total assets (item AT), closing share price (PRCC_F), common shares (CSHO), and net income (NI) for the first fiscal year end after the conclusion of the IPO. We require that each firm have non-missing item AT for inclusion in the sample, leaving 2,465 firms available for analysis. For these firms we code each that reports a non-zero amount of pre-tax foreign income (Compustat item PIFO), foreign deferred tax liability (item TXDFO), or foreign tax expense (item TXFO) in the year of IPO or the subsequent three years as having foreign operations. If all of those amounts are zero or missing we code the firm as having solely domestic income. Table 2 Incorporation Locations of U.S. Headquartered MNCs Country of Incorporation Number Percentage of Total United States 874 95 Tax Haven 27 3 Israel 10 1 Canada 3 0.3 Netherlands 2 0.2 Germany 1 0.1 Philippines 1 0.1 Total 918 Notes: See Table 1 for sample description. A firm is classified as incorporated in a tax haven jurisdiction if the 2 digit country code corresponds to a country listed as a tax haven by Dharmapala and Hines (2009, p. 1067); see footnote 3 for a list of these countries. Table 3 Comparison of U.S-Headquartered MNCs that Incorporate in Tax Havens to Total U.S.-Headquartered MNCs that Incorporate in the United Statesor in Tax Havens Incorporated in a Tax Haven Year Total Number Percentage 1997 139 3 2 1998 78 0 0 1999 127 1 1 2000 120 4 3 2001 37 1 3 2002 19 3 16 2003 22 1 5 2004 74 1 1 2005 65 3 5 2006 70 3 4 2007 80 3 4 2008 8 0 0 2009 23 2 9 2010 39 2 5 901 27 3 Notes: See Table 1 for the sample description and footnote 3 for the list of tax havens. Table 4 Mean Values for Selected Financial Variables for MNCs Headquartered in the United States($Million) Incorporation Location Variable US Tax Haven Difference [ASSETS.sub.t] 832.9 1,725.4 892.5 ** [SIZES.sub.t] 1,295.9 3,141.2 1,845.3 * [INC.sub.t] -0.04 0.03 -0.07 * FORINC 0.23 0.64 -0.41 *** RD 0.09 0.05 0.03 N 556 19 Notes: Asterisks denote significance at the 1% (***), 5% (**) and 10% (*) levels. Significance is calculated using Satterthwaite standard errors. See Table 1 for the sample description, and footnote 3 for the list of tax havens. Variable definitions are as follows: [ASSETS.sub.t] is the total assets at the end of year t (item AT); SIZE is the price per share at the end of the year (PRCC_F) multiplied by common shares outstanding (CSHO); [INC.sub.t] is net income (NI)/AT, FORINC is the average of pre-tax foreign income (FIFO) divided by total pre-tax income (PI) from years t to t+3; and RD is Research and Developent Expense (XRD) divided by ending total assets (AT) in the year of IPO. If XRD is missing, we code XRD as equal to zero. All variables are winsorized at the 1% and 99% levels. Table 5 Breakdown of the Headquarters Location of Firms that Incorporate in Tax Havens Percentage Country HQ Number of Total China 98 47 United States 47 22 Greece 16 8 Hong Kong 13 6 Other 36 17 Total 210 Notes: No other country comprises more than 1 percent of the tax-haven sample. See Table 1 for the sample description, and footnote 3 for the list of tax havens. Table 6 U.S.-Headquartered, Tax-Haven-Incorporated U.SAPO Firms, 1997-2010 Incorporation Name Year IPO Date Accenture Ltd. 2001 7/18/01 Aircastle Ltd. 2004 8/7/06 Alcon Inc. 1971 3/20/02 Amdocs Ltd. 1988 6/19/98 American Safety 1986 2/13/98 Insurance Group Ltd. Apex Silver Mines Ltd. 1996 11/25/97 Aspen Insurance 2002 12/3/03 Holdings Ltd. Assured Guaranty Ltd. 2003 9/29/04 Avago Technologies 2005 8/5/09 Ltd. Baltic Trading Ltd. 2009 3/9/10 Bunge Ltd. 1995 8/1/01 CastlePoint Holdings 2005 3/22/07 Ltd. CDC Software Corp. 2009 8/5/09 CRM Holdings Ltd. 2005 12/20/05 Eagle Bulk Shipping 2005 6/22/05 Inc. Fabrinet 1999 6/24/10 FGX International 2004 10/24/07 Holdings Ltd. Flagstone Reinsurance 2005 3/29/07 Holdings Ltd. Fresh Del Monte 1996 10/23/97 Produce Ltd. Garmin Ltd. 2000 12/8/00 Genco Shipping and 2004 7/21/05 Trading Ltd. General Maritime Corp. 2001 6/12/01 Global Crossing Ltd. 1997 8/13/98 Greenlight Capital Re 2004 5/24/07 Herbalife Ltd. 2002 12/15/04 interWAVE 1994 1/28/00 Communications International Ltd. Iridium World 1996 6/9/97 Communications Ltd. Lazard Ltd. 2004 5/4/05 Marvell Technology 1995 6/26/00 Group Ltd. Max Re Capital Ltd. 1999 8/13/01 MF Global Ltd. 2007 7/18/07 Montpelier Re Holdings 2001 10/9/02 OneBeacon Insurance 2006 11/8/06 Group Ltd. Open TV Corp 1999 11/23/99 Platinum Underwriters 2002 10/28/02 Holdings Ltd. Primus Guaranty Ltd. 1998 9/26/04 RSL Communications 1996 9/30/97 Ltd. Santa Fe International 1990 6/9/97 Corp. SeaCube Container 2010 10/27/10 Leasing Ltd. Seagate Technology 2000 12/10/02 Holdings Stirling Cooke Brown 1995 11/25/97 Holdings Ltd. TyCom Ltd. 2000 7/26/00 United National Group 2003 12/15/03 Ltd. UTi Worldwide Inc. 1995 11/2/00 Validus Holdings Ltd. 2005 7/24/07 Vistaprint Ltd. 2002 9/29/05 Warner Chilcott 2004 9/20/06 Holdings Co. Ltd. Name Industry Accenture Ltd. Business Services Aircastle Ltd. Business Services Alcon Inc. Instruments and Related Products Amdocs Ltd. Business Services American Safety Insurance Agents, Brokers, and Insurance Group Service Ltd. Apex Silver Mines Ltd. Metal Mining Aspen Insurance Insurance Carriers Holdings Ltd. Assured Guaranty Ltd. Insurance Carriers Avago Technologies Electronic and Other Ltd. Equipment Baltic Trading Ltd. Water Transportation Bunge Ltd. Food and Kindred Products CastlePoint Holdings Insurance Carriers Ltd. CDC Software Corp. Business Services CRM Holdings Ltd. Insurance Carries Eagle Bulk Shipping Water Transportation Inc. Fabrinet Electronic and Other Equipment FGX International Instruments and Related Holdings Ltd. Products Flagstone Reinsurance Insurance Carriers Holdings Ltd. Fresh Del Monte Food and Kindred Products Produce Ltd. Garmin Ltd. Instruments and Related Products Genco Shipping and Water Transportation Trading Ltd. General Maritime Corp. Water Transportation Global Crossing Ltd. Communication Greenlight Capital Re Insurance Carriers Herbalife Ltd. Wholesale Trade interWAVE Electronic and Other Communications Equipment International Ltd. Iridium World Communication Communications Ltd. Lazard Ltd. Security and Commodity Brokers Marvell Technology Electronic and Other Group Ltd. Equipment Max Re Capital Ltd. Insurance Carriers MF Global Ltd. Security and Commodity Brokers Montpelier Re Holdings Insurance Carriers OneBeacon Insurance Insurance Carriers Group Ltd. Open TV Corp Business Services Platinum Underwriters Insurance Carriers Holdings Ltd. Primus Guaranty Ltd. Security and Commodity Brokers RSL Communications Communication Ltd. Santa Fe International Oil and Gas Extraction Corp. SeaCube Container Business Services Leasing Ltd. Seagate Technology Industrial Machinery and Holdings Equipment Stirling Cooke Brown Insurance Carriers Holdings Ltd. TyCom Ltd. Communication United National Group Insurance Carriers Ltd. UTi Worldwide Inc. Transportation Services Validus Holdings Ltd. Insurance Carriers Vistaprint Ltd. Printing and Publishing Warner Chilcott Chemicals and Allied Holdings Co. Ltd. Products
|Copyright:||(c) 2013 National Tax Association|