Tax avoidance strategies under radar: policy considerations on U.S. multinational corporations operating in emerging markets

U.S. Multinational Corporations (MNCs) are known for their torturous global tax avoidance strategies. Corporate tax avoidance by U.S. MNCs remains a critical concern for policymakers, particularly in emerging economies, where profit shifting strategies and Phantom FDIs have been reported to corrode local tax bases. This study pinpoints the firm-specific determinants that enable tax avoidance strategies of U.S. MNCs and theoretically links them to their potential role in aggravating tax base erosion in emerging markets. Drawing on a sample of U.S. firms from SEC filings, the analysis employs fixed effects regression with Driscoll-Kraay standard errors. The results indicate that capital-intensive firms do not substantially lower their GAAP Effective Tax Rates (GETRs), possibly due to sector-specific dynamics in industries such as IT and Pharmaceuticals, where a high level of R&D tax incentives is prevalent. MNCs with higher inventory levels face elevated GETRs, having fewer opportunities for tax avoidance, while R&D-intensive firms reduce GETRs significantly by leveraging domestically available tax credits and deductions. Financially leveraged firms expand their Book-Tax Differences (BTDs) by exploiting thin capitalization to minimize their tax obligations, while large-sized and higher profit-making U.S. MNCs aggressively reduce GETRs and increase BTDs through profit shifting strategies, primarily via tax havens. These findings indicate that subsidiaries or affiliates of U.S. MNCs in emerging markets may shove profit shifting practices, thereby aggravating tax base erosion. The study stresses the vulnerability of emerging markets, urging stronger tax laws, tax audits, and unilateral & multilateral actions to ensure that U.S. MNCs pay fair share of corporate taxes in emerging markets.