Tax Uncertainty and Incremental Tax Avoidance

2018 ◽  
Vol 94 (2) ◽  
pp. 229-247 ◽  
Author(s):  
David A. Guenther ◽  
Ryan J. Wilson ◽  
Kaishu Wu
Keyword(s):  
Tax Avoidance ◽  
System Of Equations ◽  
Tax Benefits ◽  
Jel Classifications ◽  
Tax Uncertainty

ABSTRACT We investigate whether tax avoidance becomes more uncertain as the rate of tax avoidance increases. We estimate a system of equations to demonstrate that as firms' pretax income increases, each additional dollar of potential tax results, on average, in 32.8 cents of tax avoided, which we refer to as incremental tax avoidance. Of the incremental tax avoided, 1.4 cents represent additions to the reserve for uncertain tax benefits (UTB reserve), or 4.3 percent of the total incremental tax avoided. We then partition sample firms into groups that prior research suggests engage in higher rates of tax avoidance, and examine the amount of incremental tax avoidance that results in additions to the UTB reserve. Results demonstrate that the percentage of incremental tax avoidance reflecting additions to UTB reserve is not larger for groups engaging in higher rates of tax avoidance, suggesting higher rates of tax avoidance may not be more uncertain. JEL Classifications: H26; M41; M48.

scholarly journals When Does Tax Avoidance Result in Tax Uncertainty?

2018 ◽  
Vol 94 (2) ◽  
pp. 179-203 ◽  
Author(s):  
Scott D. Dyreng ◽  
Michelle Hanlon ◽  
Edward L. Maydew
Keyword(s):  
Transfer Pricing ◽  
Tax Avoidance ◽  
Pricing Strategies ◽  
Tax Rates ◽  
Effective Tax Rates ◽  
Time Period ◽  
Tax Haven ◽  
Tax Benefits ◽  
Tax Uncertainty

ABSTRACT We investigate the relation between tax avoidance and tax uncertainty, where tax uncertainty is the amount of unrecognized tax benefits recorded over the same time period as the tax avoidance. On average, we find that tax avoiders, i.e., firms with relatively low cash effective tax rates, bear significantly greater tax uncertainty than firms that have higher cash effective tax rates. We find that the relation between tax avoidance and tax uncertainty is stronger for firms with frequent patent filings and tax haven subsidiaries, proxies for intangible-related transfer pricing strategies. The findings have implications for several puzzling results in the literature.

Equity Compensation and Tax Avoidance: Disentangling Managerial Incentives from Tax Benefits and Reexamining the Effect of Shareholder Rights

2017 ◽  
Vol 39 (2) ◽  
pp. 21-41 ◽  
Author(s):  
Jeri K. Seidman ◽  
Bridget Stomberg
Keyword(s):  
Empirical Evidence ◽  
Tax Avoidance ◽  
Managerial Incentives ◽  
Shareholder Rights ◽  
Rent Extraction ◽  
Negative Relation ◽  
Equity Compensation ◽  
Early Evidence ◽  
Tax Benefits ◽  
Jel Classifications

ABSTRACT Much empirical evidence is consistent with properly incentivized executives engaging in more tax avoidance. However, other studies provide evidence consistent with tax avoidance facilitating managerial rent extraction. We address these mixed results by reexamining the negative relation between executives' equity compensation and tax avoidance that is concentrated in firms with weaker shareholder rights. We propose this pattern of results is consistent with tax exhaustion theory because tax benefits from equity compensation reduce firms' demand for additional tax avoidance. Further, we draw on evidence suggesting shareholder rights indices are problematic as measures of governance when examining tax avoidance. Our results suggest tax exhaustion is a more compelling explanation for the relation between executives' equity compensation and tax avoidance. Although our analyses do not disprove the notion that managers can use tax avoidance to facilitate rent extraction, they challenge the interpretation of early evidence suggesting this behavior is widespread. JEL Classifications: H25; H26; M41; M52.

Tax Avoidance and Tax Uncertainty

2019 ◽  
Vol 36 (1) ◽  
pp. 9-54
Author(s):  
JongIl Park ◽  
KyuAn Jeon
Keyword(s):  
Tax Avoidance ◽  
Tax Uncertainty

Code Section 304: The Gift That Keeps on Giving

2019 ◽  
Vol 17 (1) ◽  
pp. 25-39
Author(s):  
Doron Narotzki ◽  
Melanie G. McCoskey
Keyword(s):  
Tax Avoidance ◽  
Tax Planning ◽  
Expected Loss ◽  
Legislative Change ◽  
Planning Tools ◽  
The Gift ◽  
Foreign Corporations ◽  
Jobs Act ◽  
The U.S ◽  
Jel Classifications

ABSTRACT The Tax Cuts and Jobs Act (TCJA) has created a unique opportunity to utilize Code Section 304 and Code Section 245A as powerful tax-planning tools. By utilizing the rules established for redemptions between related corporations under the anti-abuse provisions of Code Section 304 combined with the new 100 percent DRD of Code Section 245A, extracting earnings from affiliated foreign corporations tax-free has never been easier. This paper explains how these two code sections interact with each other and the resulting ability to extract certain foreign-sourced earnings tax-free. It also identifies incentives created by the TCJA to operate profitable businesses overseas and expected loss operations in the U.S. Finally, the paper offers a legislative change to close the tax avoidance loophole created by the TCJA. JEL Classifications: H2.

scholarly journals Corporate Tax Avoidance and Debt Costs

2019 ◽  
Vol 42 (2) ◽  
pp. 117-143 ◽  
Author(s):  
Terry Shevlin ◽  
Oktay Urcan ◽  
Florin P. Vasvari
Keyword(s):  
Private Information ◽  
Information Quality ◽  
Tax Avoidance ◽  
Bank Loan ◽  
Bond Yields ◽  
Corporate Tax ◽  
Cross Sectional ◽  
Negative Effect ◽  
Loan Spreads ◽  
Jel Classifications

ABSTRACT We use path analysis to investigate how corporate tax avoidance is priced in bond yields and bank loan spreads. We find that approximately one half of the total effect of tax avoidance on bond yields is explained through the negative effect of tax avoidance on future pre-tax cash flow levels and volatility and, to a lesser extent, lower information quality. The effects of these mediating variables are much less pronounced for bank loan spreads. The results of additional cross-sectional analyses indicate that, relative to bond investors, banks are able to reduce information asymmetry problems more effectively, given their access to firms' private information and greater ability to monitor borrowers. JEL Classifications: G31; G32; M10; O16.

The Impact of Tax Incentives on the Choice to Hold Shares Acquired from Employee Stock Option Exercises

2012 ◽  
Vol 34 (2) ◽  
pp. 67-91 ◽  
Author(s):  
G. Ryan Huston ◽  
Thomas J. Smith
Keyword(s):  
Stock Options ◽  
Tax Incentives ◽  
Stock Option ◽  
Corporate Tax ◽  
Negative Relation ◽  
Employee Stock Option ◽  
Prior Literature ◽  
Tax Benefits ◽  
The Impact ◽  
Jel Classifications

ABSTRACT This paper extends prior stock option literature by examining the impact of individual and corporate tax incentives on the decision to hold or sell shares acquired through the exercises of incentive stock options (ISOs) and non-qualified stock options (NQSOs). We focus on factors found in prior literature to be associated with the choice to hold or sell in the context of the type of stock option exercised. Specifically, we find that the positive (negative) relation found in prior literature between the decision to hold shares following exercise and future returns (depth) is associated more with NQSOs than ISOs, consistent with individual tax incentives. Examining corporate tax incentives, we find that corporate tax benefits mitigate insiders' likelihood to hold shares obtained from ISO exercise. Furthermore, we find evidence that firms compensate employees to forgo individual tax benefits associated with holding shares from ISO exercise, and as this compensation increases, insiders are more likely to sell following exercise. JEL Classifications: H24; H25; J33.

scholarly journals Tax-related risks of mergers and acquisitions in Croatia

2019 ◽  
Vol 39 (4) ◽  
pp. 1731-1747
Author(s):  
Nataša Žunić Kovačević ◽  
Stjepan Gadžo
Keyword(s):  
Mergers And Acquisitions ◽  
Tax Avoidance ◽  
Tax Planning ◽  
Point Of View ◽  
Systematic Account ◽  
Tax Benefits

Mergers and acquisitions of Croatian target companies may involve significant tax risks for domestic and foreign acquirers. Over the recent years, Croatian tax authorities have started to vigorously assess the economic substance of the envisaged M&As, often denying the acquirer different tax benefits, thus making the entire restructuring costlier. In doing so, Croatian tax authorities rely on a myriad of domestic anti-tax avoidance rules according to which M&A operations may be characterised as abusive. Accordingly, this paper offers a descriptive and systematic account on how Croatian anti-tax avoidance legislation may hinder M&A activity. Thereby, our aim is primarily to explore, both from a substantive and procedural point of view, the imagined boundary between legitimate and abusive tax planning.

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