The Effect of Non‐US Tax Authority Monitoring on Income Shifting by Affiliates of US Multinationals: Evidence From EDGAR Search Activity

Governments worldwide are concerned that multinational enterprises (MNEs) shift profits across borders to avoid taxes. While prior research shows that home‐country tax enforcement can reduce tax avoidance, far less is known about whether foreign tax authorities (FTAs) can constrain income shifting by MNE affiliates. We measure FTA monitoring using data on FTAs' downloads of US MNEs' annual reports filed with the SEC. We find that FTA monitoring is more intensive in higher‐tax‐rate countries with a larger MNE presence, consistent with those jurisdictions facing stronger incentives to monitor income shifting. More importantly, we find that monitoring by an affiliate's local tax authority does not systematically reduce income shifting by US MNE affiliates, whereas aggregate monitoring in the MNE group affects an affiliate even when its own local FTA is not observably monitoring it. This result is consistent with a spillover effect of FTA monitoring. This association is stronger when FTAs operate under information‐exchange treaties, when company disclosures are more detailed, and when enforcement capacity is greater. We also find positive associations between aggregate FTA monitoring and subsequent tax avoidance and tax settlements of US MNEs. Our findings suggest monitoring by multiple FTAs effectively combats MNE tax avoidance and have implications for how tax administrations design and coordinate monitoring efforts.