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What drives the tax avoidance strategies adopted by US MNEs? Understanding the heterogeneity of approaches to corporate tax planning in US multinational enterprises

Cooper, M. (2018) What drives the tax avoidance strategies adopted by US MNEs? Understanding the heterogeneity of approaches to corporate tax planning in US multinational enterprises. PhD thesis, University of Reading

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Abstract/Summary

‘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 subsidiarylevel, 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 6 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. 7 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.

Item Type:Thesis (PhD)
Thesis Supervisor:Casson, M. and Nguyen, Q.
Thesis/Report Department:Henley Business School
Identification Number/DOI:
Divisions:Henley Business School > International Business and Strategy
ID Code:77929

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