Study Finds That Foreign Multinational Firms Engage in Limited Tax-Motivated Income Shifting Out of the United States

Income shifting by multinational firms has been researched extensively, yet few studies have examined foreign-owned businesses shifting income out of the United States. In a new study, Jim Albertus at Carnegie Mellon University evaluated the impact of tax incentives on foreign-owned U.S. businesses’ income shifting, employment, and investment decisions. He found that foreign multinational firms engage in a modest degree of tax-motivated income shifting out of the United States. The results inform the potential effects of the “Revenge Tax” provisions of the June 2025 tax bill under consideration in the U.S. Congress.

The study is published in The Review of Financial Studies.

“I analyzed the implementation of controlled foreign corporation rules,” explains Albertus, Assistant Professor of Finance at Carnegie Mellon’s Tepper School of Business, who conducted the study. “The results indicate that foreign multinational firms shift a modest amount of income out of the U.S. for tax reasons, and this income shifting in turn supports a modest amount of employment and investment in the United States.”

Research on income shifting out of the United States by foreign multinational firms is limited for two reasons. First, company-level data on foreign multinationals’ U.S. operations are not publicly available. To address this challenge, Albertus assembled a comprehensive, confidential data set of the U.S. operations of foreign multinational firms.

The panel includes information from each subsidiary’s income statement and balance sheet, and was constructed from responses to mandatory surveys conducted by the Bureau of Economic Analysis. The study used these data to evaluate how the U.S. subsidiaries of foreign multinational firms report income and operate in the United States.

Second, studying foreign firms’ income shifting out of the United States requires variation in firms’ incentives to engage in this activity. Changes in U.S. federal tax policy apply to all firms, leaving no control group. Albertus addressed this and other challenges by considering the staggered implementation of foreign countries’ controlled foreign corporation rules, which provided a natural control group and allowed analysis of tax incentives for income shifting by foreign-owned U.S. businesses.

Albertus finds that foreign multinational firms primarily rely on tax-motivated transfer pricing to shift income out of the United States. Additional results suggest that foreign-owned U.S. businesses do not typically engage in earnings stripping, in which intracompany loans are used to shift income.

When foreign tax policy changes inhibited income shifting, foreign-owned U.S. subsidiaries’ investment and employment declined by modest amounts. The results indicate that the U.S. economy has limited exposure to tax policies set abroad through foreign direct investment in the United States.

The study received financial support from New York University’s Stern Center for Global Economy and Business.

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Summarized from an article in The Review of Financial Studies, Income Shifting out of the United States by Foreign Multinational Firms, by Albertus, JF (Carnegie Mellon University). Copyright 2024 Society for Financial Studies. All rights reserved.