This note examines the extent to which firms affected by a change in the tax law respond by making changes in the accounting methods used for financial reporting. The specific tax issue considered is the Thor Power Tool case that limited the use of formula write-downs for inventories. Since LIFO could be approximated by formula write-downs, we hypothesize that affected firms will tend to switch to LIFO during 1979 (and only during 1979) for tax reporting purposes and (because of the LIFO conformity rule) for financial reporting purposes as well. The empirical analyses of inventory method changes are consistent with this hypothesis.

[This note examines the extent to which firms affected by a change in the tax law respond by making changes in the accounting methods used for financial reporting. The specific tax issue considered is the Thor Power Tool case that limited the use of formula write-downs for inventories. Since LIFO could be approximated by formula write-downs, we hypothesize that affected firms will tend to switch to LIFO during 1979 (and only during 1979) for tax reporting purposes and (because of the LIFO conformity rule) for financial reporting purposes as well. The empirical analyses of inventory method changes are consistent with this hypothesis.]

Inventories, LIFO, Inventories orders, Tax liabilities

Multinational Enterprises (MNEs) have an incentive to shift income to lowertaxed jurisdictions. On July 1,1994, the Treasury Department issued intercompany transfer pricing regulations to mitigate such transfer of income resulting from the use of intangibles. The regulations give three alternative methods--(1) Comparable Uncontrolled Transactions (CUT), (2) Comparable Profit Method (CPM) and (3) Profit Split--to tax the intangibles. However, each of these three methods introduces incentives to the MNEs to alter resource allocations in comparison with a full-information optimum. In this paper, we examine the resource allocation changes under each method. The policy alternative to the use of such approximating measures is an increased attempt at direct valuation.

The two most commonly used transfer pricing rules for tax purposes pursuant to Reg. Sec. 1.482 are the "resale price" method and the "cost plus" method. This paper analyzes the effects of each of these methods on the resource allocation decisions of multinational firms when the tax rate abroad is lower than in the U.S. We show that, relative to the resource allocation that would exist in the absence of taxation: (1) the resale price method can cause either an increase or decrease in imports, an overuse of domestic resources, and overproduction of the "most similar product"; and (2) the cost plus method causes a decrease in imports, a decrease in the use of domestic resources, and overproduction of the most similar product. These effects are reversed when the tax rate abroad is higher than in the U.S. In addition, we deal with the case where the MNE faces different transfer pricing regulations in the U.S. and the foreign country.

This paper analyzes the payment of monetary compensation (salary) and nontaxable benefits and develops an expansion path for the optimal combination of salary and benefits. The results explain why 1) the employer has an incentive to pay nontaxable benefits instead of salary, 2) benefits such as health insurance are given to lowly as well as highly paid employees while perquisites become a more favored form of compensation as employees' incomes increase, 3) an employee at or near the minimum wage for his or her occupation may receive increases in compensation in the form of increased nontaxable benefits, 4) a broad class of middle management employees are all paid the maximum legal benefits for their job classification, and 5) the employer may authorize the payment of possibly nondeductible benefits to highly compensated executives.