This paper provides evidence that keiretsu group member firms are subject to lower effective tax rates than independent firms in Japan. As an explanation, we develop a hypothesis that keiretsu firms strategically shift financially reported income among affiliates in order to reduce overall effective tax rates. Empirical evidence supports this income-shifting hypothesis since the positive relation between pre-tax return on firm value and marginal tax rate status is significantly mitigated by keiretsu membership. Contrasting conjecture, keiretsu income-shifting activities intensify when Japanese firms face economic recession. The evidence also suggests that benefactors of shifted income are compensated via increased dividends.