Do US firms or their European peers pay less tax? On firm characteristics, profit shifting opportunities, and tax legislation as determinants of tax differentials

Using pairs of similar US and European firms listed on the S&P500 or StoxxEurope600, we examine effective tax differentials between US multinational corporations (MNCs) and their European peers prior to the US tax reform. We show that US MNCs’ overall effective tax rates were significantly determined by the high US corporate tax rate before the fundamental US tax reform. Our results also suggest that US MNCs benefited more from profit shifting opportunities compared to their European peers. Based on past reforms of Controlled Foreign Company (CFC) rules and an abolishment of a worldwide tax system, we find that changes in the international tax legislation affect effective tax expenses. We also provide evidence for heterogeneity in tax responses. Our results suggest that firms with profit shifting opportunities benefit most from more-lenient CFC rules while changes in the international tax system are not related to profit shifting opportunities.

Invited by Dirk Schindler