The Effect of Tax Rate Change on Inversions by Multinational Enterprises in the United States

Abstract

Abstract Inversions are major international tax issues for tax administrators and multinational enterprises (MNEs) as MNEs shift profit from high-tax to low-tax countries to minimize their global effective tax rate. These inversions determine the residency and consequent withholding tax (WHT) liabilities and reporting of income of associated enterprises in different tax jurisdictions. This study addressed five research questions with the first examining the difference in the reporting of WHT and the next four examined the difference in the reporting of total U.S.-Source income as well as its components including dividends, interest, and rent/royalties in respect of WHT collections, before and after the 2017 U.S. CIT tax rate reduction. Analyzing data from the U.S. Internal Revenue Service suggest that after the updated legislation, the WHT collections increases on payment to non-residents in respect to all countries other than tax havens. Also, there were significant increases in total U.S.-Source Income as well as the dividends and rent/royalties components but a significant decrease in the interest component in respect of WHT collections on payment to non-residents for all countries other than tax havens. Alternatively, there was a significant increase in the interest component in respect of WHT collections on payment to non-residents for tax havens. These results do not support shifting of residency back to the US but increased residency and transactions’ value to countries other than tax havens as well as the shifting of the value of loans from countries other than tax havens to tax havens.