Although the phenomenon of income shifting by multinational corporations has been the subject of considerable scholarly attention, much of the existing research has concentrated on domestic firms or those headquartered in the United States. Few studies have scrutinised the behaviours of foreign-owned companies operating within the U.S., particularly regarding their tax strategies and decisions to reallocate income abroad. In a new study published in The Review of Financial Studies, Jim Albertus, Assistant Professor of Finance at Carnegie Mellon University’s Tepper School of Business, addresses this gap by examining how foreign multinationals respond to tax incentives and how these responses affect their reported income, employment, and investment patterns within the United States.

Albertus’s findings suggest that while foreign multinational firms do engage in income shifting for tax reasons, the degree to which this occurs is relatively modest. The primary mechanism utilised for this purpose is transfer pricing—where firms adjust the prices of intercompany transactions to allocate profits to jurisdictions with more favourable tax regimes. Notably, the study finds little evidence to suggest that these firms commonly rely on more aggressive tactics, such as earnings stripping, wherein interest deductions on internal loans are used to reduce taxable income. This measured level of tax avoidance challenges some prevailing assumptions about the scale of base erosion associated with foreign direct investment. It offers a more tempered view of the strategic behaviour of foreign-owned U.S. businesses.

Albertus compiled a confidential and comprehensive dataset using information from the Bureau of Economic Analysis to overcome one of the main challenges in studying foreign multinationals—the absence of publicly available, detailed data on their U.S. operations. These data, derived from mandatory surveys, included subsidiary-level financial statements and balance sheets, offering a rare and thorough view into how these firms report income and manage their domestic operations. By leveraging this unique panel dataset, the study can explore the operational footprints of foreign-owned firms in the U.S. with precision not typically possible in previous literature.

A second methodological hurdle lies in the difficulty of isolating the effects of tax incentives on foreign-owned firms since changes in U.S. tax policy tend to apply uniformly to all businesses, thereby eliminating the possibility of a natural control group. To address this, Albertus innovatively uses the staggered adoption of controlled foreign corporation (CFC) rules by foreign governments. These rules, which govern the taxation of foreign subsidiaries’ profits, provide natural variation in the international tax environment. This allowed the study to assess how differences in foreign tax policy affect the incentives and behaviour of multinationals with U.S.-based subsidiaries, offering a rare quasi-experimental setting for analysis.

The empirical results indicate that when foreign countries implemented stricter CFC rules, thereby limiting the benefits of income shifting, foreign-owned subsidiaries in the United States reduced their investment and employment levels. These declines, though modest, reveal that tax-motivated income shifting does not occur in isolation from firms’ real economic activities. Instead, the ability to shift income appears to support a degree of economic activity—capital expenditure and job creation—that may be sensitive to changes in international tax policy. From a U.S. policy perspective, this suggests that foreign tax reforms can have tangible, albeit limited, spillover effects on domestic economic performance through their influence on foreign direct investment.

These findings carry significant implications for current policy debates, particularly in light of the proposed “Revenge Tax” provisions in the U.S. tax bill under congressional consideration in June 2025. Albertus’s work provides critical empirical grounding to assess the potential economic consequences of such measures. While foreign multinationals do shift some income out of the U.S. in response to tax incentives, the extent of this activity appears limited, and its economic impact, though real, is not substantial. As policymakers weigh the risks of tax base erosion against the benefits of attracting and retaining foreign investment, this study contributes a balanced and evidence-based perspective to a debate often dominated by more extreme characterisations of corporate tax avoidance.

More information: James F Albertus, Income Shifting out of the United States by Foreign Multinational Firms, Review of Financial Studies. DOI: 10.1093/rfs/hhaf021

Journal information: Review of Financial Studies Provided by Carnegie Mellon University