The Foreign Market Effect and Estimating Tax-Motivated Income Shifting
Abstract
We present evidence that the negative association between foreign profitability and tax ratesconventionally interpreted as income shifting-is appreciably driven by the economics of foreign markets unrelated to international tax planning. To improve income shifting estimates, we propose incorporating country fixed effects in foreign profitability-based tests and/or using domestic profitability-based tests to validate results. We demonstrate that including country fixed effects lowers estimated outbound income shifting from $44.0 million to $29.3 million per U.S. multinational firm annually, representing a 33.4 percent reduction. These recommendations benefit future income shifting research employing profitability-based models.
Fields of Study & Subjects
Corporate Taxation and Avoidance
Publication details
- Journal / source
- National Tax Journal
- Volume
- 79
- Issue
- 2
- Pages
- 267–304
- Publication date
- 30 April 2026
- Language
- EN