Publication Type

Journal Article

Version

submittedVersion

Publication Date

4-2024

Abstract

This study examines whether multinational corporations (MNCs) reclassify related-party payments to avoid the new base erosion and anti-abuse tax (BEAT). The Tax Cuts & Jobs Act of 2017 included the BEAT to combat income shifting from the U.S. to foreign entities. An exclusion in the tax law provides MNCs an incentive to reclassify related-party payments as cost of goods sold. We use a triple-difference design that leverages the BEAT filing threshold of $500 million in revenue and the parent company’s location to document increases in the unconsolidated sales of foreign subsidiaries of MNCs subject to BEAT relative foreign subsidiaries of MNCs not subject to BEAT consistent with cost reclassification. We also find this effect is strongest in MNCs with more related-party payments. Overall, our results imply that firms use the subjectivity inherent in cost classification to reclassify costs as cost of goods sold to avoid the BEAT.

Keywords

Tax planning, income shifting, cost reclassification, foreign tax, tax, TCJA, BEAT

Discipline

Accounting | Corporate Finance

Research Areas

Corporate Governance, Auditing and Risk Management

Publication

Journal of Accounting and Economics

Volume

77

Issue

2-3

First Page

1

Last Page

20

ISSN

0165-4101

Identifier

10.1016/j.jacceco.2023.101648

Publisher

Elsevier

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1016/j.jacceco.2023.101648

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