Why are U.S.-Owned Foreign Subsidiaries Not Tax Aggressive?

This paper empirically tests a theory laid out in Scholes et al. (2015, p. 315) that the U.S.
worldwide tax system reduces the incentive of U.S. parent companies to be tax aggressive in
their foreign subsidiaries. Investors subject to a worldwide tax system pay taxes on their
worldwide income, regardless of the origin thereof. Therefore, a U.S. investor pays the difference
between the effective tax payment abroad and the higher U.S. statutory tax when profits are
repatriated. In contrast, investors subject to territorial tax systems gain the full tax savings from
being tax aggressive abroad. Our results show that U.S.-owned foreign subsidiaries have a by 1.2
percentage point higher average GAAP effective tax rate (ETR) compared to subsidiaries owned
by foreign investors from countries with a territorial system. We contribute to the literature by
showing a mechanism, other than cross-country profit shifting, why U.S. multinational
companies have higher GAAP ETRs than multinationals subject to territorial tax systems.