Foreign Exchange Risk, Hedging, and Tax‐Motivated Outbound Income Shifting

What is it about?

I examine whether foreign exchange (FX) risk constrains tax‐motivated outbound income shifting by U.S. multinational corporations. My findings indicate that exposure to greater currency volatility is associated with less outbound income shifting, and this effect is stronger for firms with foreign affiliates using foreign functional currencies. I also find that U.S. firms that use more currency derivatives tend to shift more income to low‐tax foreign jurisdictions.

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Why is it important?

This paper sheds light on whether FX risk is an important cost of outbound income shifting.