ABSTRACT
Multinational companies (MNCs) have historically used corporate subsidiaries to isolate income earned in lower-taxed jurisdictions from tax in a higher-rate home country. This planning technique has been long accepted as a strategy to lower the MNC’s effective tax rate and maintain shareholder value. A recently study, however, demonstrates that this is an inefficient, and possibly inappropriate, strategy. This article conducts a comprehensive empirical benchmarking analysis by applying cluster analysis to empirically identify peer groups of MNCs operating in the pharmaceutical industry. We find that most firms consistently fall into the same cluster, providing evidence that income shifting can be benchmarked by industry sector. We also find special cases where firms should be excluded from the benchmark.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 Total ETR is used because of variations in how firms report deferred taxes. Moreover, the total rate is available for all firms in the panel and facilitates a larger sample size.
2 ROE is used instead of return on assets (ROA) in order to avoid using total assets as a denominator more than once.
3 ANOVA results, available upon request, show no significant differences in any of these variables by year.