Tax and Nontax Incentives in Income Shifting: Evidence from Shadow Insurers

Income shifting is a significant concern among policymakers worldwide and a growing area of academic interest. We use the shadow insurance setting to study the interplay between tax and nontax incentives in income shifting. Shadow insurance involves intercompany transactions ostensibly designed to help firms meet regulatory capital requirements. We argue that prior to the Tax Cuts and Jobs Act of 2017 (TCJA), foreign owned life insurance firms could use it to shift their U.S. profits to tax havens and save taxes. We find that although nontax incentives appear to be the dominant factor behind firms’ use of shadow insurance, tax considerations also played a significant role for certain firms. While our results suggest that taxes provided an important incentive for foreign owned life insurance firms to use shadow insurance, our study also highlights that, in this setting, nontax considerations appear to motivate U.S. owned firms’ use of tax havens.

Keywords: Income Shifting; Tax Avoidance; Shadow Insurance

JEL Classification: G35; H25; M40

Suggested Citation: Suggested Citation

Hepfer, Bradford F. and Wilde, Jaron H. and Wilson, Ryan J., Tax and Nontax Incentives in Income Shifting: Evidence from Shadow Insurers (August 2019). Mays Business School Research Paper No. 2836215, Available at SSRN: https://ssrn.com/abstract=2836215 or http://dx.doi.org/10.2139/ssrn.2836215