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.

Challenges of Monitoring Tax Compliance by Multinational Firms: Evidence from Chile

2019 ◽  
Vol 109 ◽  
pp. 500-505
Author(s):  
Sebastián Bustos ◽  
Dina Pomeranz ◽  
José Vila-Belda ◽  
Gabriel Zucman
Keyword(s):  
Multinational Firms ◽  
Transfer Pricing ◽  
Tax Avoidance ◽  
Tax Compliance ◽  
Tax Rates ◽  
Profit Shifting ◽  
Effective Tax Rates ◽  
Arm’S Length Principle ◽  
Debt Shifting

This paper reviews common challenges of taxing multinational firms, using Chile as a case study. We briefly describe key international tax avoidance methods: profit shifting to low-tax jurisdictions through transfer pricing and debt shifting. We discuss the prevalent policy to tax multinationals--the arm's length principle--and alternative proposals using apportionment formulas. Novel data from Chile show that multinationals make up a large share of GDP but report lower profit and effective tax rates than local firms. In 2011, Chile implemented a reform following OECD guidelines to enforce the arm's length principle. We discuss potential effects on tax collection and welfare.

Does Tax Risk Affect Investor Valuation of Tax Avoidance?

2017 ◽  
Vol 34 (1) ◽  
pp. 151-176 ◽  
Author(s):  
Katharine D. Drake ◽  
Stephen J. Lusch ◽  
James Stekelberg
Keyword(s):  
Firm Value ◽  
Tax Avoidance ◽  
Cash Flows ◽  
Equity Capital ◽  
Tax Rates ◽  
Cost Of Equity Capital ◽  
Effective Tax Rates ◽  
Fin 48 ◽  
Tax Benefits ◽  
The Cost

We examine how investors value tax avoidance (measured as the level of cash effective tax rates [ETRs]) and tax risk (measured as the volatility of cash ETRs), and how these constructs interact to influence firm value. Our results suggest that investors positively value tax avoidance but negatively value tax risk and, most importantly, that greater tax risk moderates the positive valuation of tax avoidance. In additional analyses, we find that contemporaneous measures of tax avoidance and tax risk provide insight into future tax cash flows and that our results hold using GAAP ETR-based measures of tax avoidance and tax risk. Finally, our results are robust to a battery of sensitivity checks including controlling for idiosyncratic and systematic risk, the cost of equity capital, and unrecognized tax benefits in the post-FIN 48 period, among others. Broadly, our findings provide new evidence on how taxes affect firm value and suggest that tax avoidance and tax risk should be considered jointly rather than in isolation.

scholarly journals The Interplay Between Tax Havens, Geographic Disclosures and Corporate Tax Avoidance: Evidence from European Union

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Sameh Kobbi-Fakhfakh
Keyword(s):  
Tax Avoidance ◽  
Positive Association ◽  
Tax Rates ◽  
Corporate Tax ◽  
Effective Tax Rate ◽  
Effective Tax Rates ◽  
Tax Havens ◽  
Tax Rate ◽  
Reporting Practices ◽  
Tax Haven

Abstract This study examines the interplay between tax haven use, geographic disclosures and corporate tax avoidance. Based on a panel of 497 non-financial EU listed firms during the period 2006–2012, we provide evidence that corporate groups with affiliates in tax havens tend to have lower effective tax rates and lower geographic disclosures fineness scores. We, also, find a positive association between geographic disclosures fineness scores and the firms’ effective tax rates. We, further, find that the negative association between tax haven use and the effective tax rate is more pronounced for firms disclosing geographic information at a more aggregated level, showing a moderating effect of geographic disclosures fineness on such association. Our findings are based upon hand-collected data on corporate geographical dispersion, and corroborated by several additional and robustness tests. The research results should be of concern to policymakers and others interested in multinational companies’ segment reporting practices and tax planning activities.

scholarly journals Income Statement Reporting Discretion Allowed by FIN 48: Interest and Penalty Expense Classification

2017 ◽  
Vol 39 (1) ◽  
pp. 45-66 ◽  
Author(s):  
John L. Abernathy ◽  
Brooke Beyer ◽  
Andrew D. Gross ◽  
Eric T. Rapley
Keyword(s):  
Forecast Accuracy ◽  
Tax Avoidance ◽  
Financial Accounting ◽  
Tax Rates ◽  
Financial Accounting Standards Board ◽  
Effective Tax Rates ◽  
Fin 48 ◽  
Income Statement ◽  
Tax Benefits ◽  
Tax Expense

ABSTRACT Financial Accounting Standards Board Interpretation No. 48 (FIN 48, FASB 2006) allows discretion regarding the income statement classification of interest and penalty expenses for unrecognized tax benefits (UTBs). We investigate whether tax avoidance, management compensation, and debt agreements affect the expense classification election and whether this discretion has implications for financial statement users. We find firms that engage in tax avoidance activities, measured by effective tax rates (ETRs) and involvement in tax disputes, are more likely to include interest and penalties in tax expense. We also find that interest and penalties are more likely to be classified as tax expense when CEO compensation is more sensitive to pre-tax income. Finally, we find that UTB interest and penalty expense classification is associated with analysts' ETR forecast accuracy, which suggests there is a potential unintended consequence related to decision usefulness of FIN 48 reporting due to expense classification discretion.

A Study of Perceived Ethicality of Low Corporate Effective Tax Rates

2017 ◽  
Vol 32 (1) ◽  
pp. 87-104 ◽  
Author(s):  
F. Todd DeZoort ◽  
Troy J. Pollard ◽  
Edward J. Schnee
Keyword(s):  
Mediation Analysis ◽  
General Public ◽  
Tax Avoidance ◽  
Tax Rates ◽  
Perceived Fairness ◽  
Effective Tax Rate ◽  
Effective Tax Rates ◽  
Tax Rate ◽  
Policy Practice ◽  
Participant Group

SYNOPSIS U.S. corporations have the ability to avoid paying domestic taxes to achieve an effective tax rate that is much lower than the statutory federal tax rate. This study evaluates the extent that individuals differ in their attitudes about the ethicality of corporations avoiding domestic taxes to achieve low effective tax rates. We also examine the extent to which the specific tax avoidance method used by corporations to access a low effective tax rate affects perceived ethicality. Eighty-two members of the general public and 112 accountants participated in an experiment with two participant groups and three tax avoidance methods manipulated randomly between subjects. The results indicate a significant interaction between participant group and tax avoidance method, with the general public considering shifting profits out of the country to achieve a low effective tax rate to be highly unethical, while the accountants find tax avoidance from carrying forward prior operating losses to be highly ethical. Further, mediation analysis indicates that perceived fairness and legality mediate the effects of participant type on perceived ethicality. Mediation analysis also reveals that sense of fairness and legality mediate the link between tax avoidance method and perceived ethicality. We conclude by considering the study's policy, practice, and research implications.

An Examination of Reputational Costs and Tax Avoidance: Evidence from Firms with Valuable Consumer Brands

2017 ◽  
Vol 39 (1) ◽  
pp. 67-93 ◽  
Author(s):  
Chelsea Rae Austin ◽  
Ryan J. Wilson
Keyword(s):  
Tax Avoidance ◽  
Tax Rates ◽  
Effective Tax Rates ◽  
Reputational Costs

ABSTRACT We expect firms with the greatest exposure to reputational damage among consumers will engage in lower levels of tax avoidance to minimize unwanted scrutiny that could impair the firms' reputation. We identify a set of firms with valuable consumer reputation using Harris Interactive's EquiTrend survey, which surveys consumers about their perceptions of valuable and prominent brands. We find evidence in support of our hypothesis that firms with valuable brands will engage in less tax avoidance. Specifically, we find a positive and significant association between our measure of reputation and both the GAAP and cash effective tax rates (measured over one and three years). We find mixed evidence on whether there is a negative and significant association between reputation and the probability the firm is engaging in tax sheltering.

Taxes and Haven Activities: Evidence from Linguistic Cues

2021 ◽  
Author(s):  
Kelvin K. F. Law ◽  
Lillian Mills
Keyword(s):  
Tax Rates ◽  
Economic Activities ◽  
Effective Tax Rates ◽  
Tax Effects ◽  
Tax Haven ◽  
Linguistic Cues ◽  
Different Types ◽  
Information Set ◽  
Mere Existence ◽  
Offshore Activities

Users of Exhibit 21 cannot tell whether a tax haven subsidiary is actively operating or a dormant shell company.  In this paper, we develop a new set of parsimonious measures to highlight the distinct mechanisms and tax effects of offshore sales to, as opposed to purchases from, tax haven countries, offering insights on the effects of certain types of offshoring activities on firms’ tax burdens.  Our main measure has about three times the effect of the mere existence of a haven subsidiary in explaining firms’ effective tax rates.  We detail the processes to predict the offshore activities in tax haven countries for firms without an Exhibit 21 and firms reporting no subsidiary operations in a tax haven country.  Relative to the mere mention of a tax haven subsidiary in Exhibit 21, our new measures provide a richer information set to capture different types of economic activities in tax haven countries.

The Internet as a Tax Haven?

2021 ◽  
Vol 13 (4) ◽  
pp. 1-35
Author(s):  
David R. Agrawal
Keyword(s):  
Average Rate ◽  
Tax Avoidance ◽  
Tax Rates ◽  
Standard Deviation Increase ◽  
Online Transactions ◽  
Online Sales ◽  
Percentage Points ◽  
Tax Haven ◽  
Internet Sales ◽  
Internet Penetration

If online transactions are tax free, increased online shopping may lower tax rates as jurisdictions seek to reduce tax avoidance; but, if online firms remit taxes, online sales may put upward pressure on tax rates because internet sales help enforce destination-based taxes. I find that higher internet penetration generally results in lower municipal tax rates but raises tax rates in some jurisdictions. The latter effect emerges in states where many online vendors remit taxes. A 1 standard deviation increase in internet penetration lowers local sales taxes in large municipalities by 0.15 percentage points, or 16 percent of the average rate. (JEL H25, H26, H71, L81, R51)

Top Management Team Intrapersonal Functional Diversity and Tax Avoidance

2020 ◽  
Author(s):  
James M. Plecnik ◽  
Shan Wang
Keyword(s):  
High Risk ◽  
Functional Diversity ◽  
Work Experience ◽  
Top Management Team ◽  
Tax Avoidance ◽  
Management Team ◽  
Top Management ◽  
Tax Rates ◽  
Effective Tax Rates ◽  
Prior Literature

Top management team (TMT) members have been shown to influence tax avoidance; however, prior literature has not identified whether the intrapersonal diversity of TMT functional backgrounds leads to higher levels of tax avoidance. To study this relationship, we utilize TMT intrapersonal functional diversity, which captures the average heterogeneity of the TMT members' work experience. The skills associated with intrapersonal functional diversity may allow managers to better understand and communicate with various parties related to firm tax policies, thereby facilitating tax avoidance. Overall, we find that TMTs with higher levels of intrapersonal functional diversity achieve lower cash effective tax rates and that these TMTs do not rely on tax strategies that pose high risk.

Visualization of tax avoidance and tax rate convergence

2019 ◽  
Vol 27 (5) ◽  
pp. 695-724 ◽  
Author(s):  
Chika Saka ◽  
Tomoki Oshika ◽  
Masayuki Jimichi
Keyword(s):  
Tax Avoidance ◽  
Tax Rates ◽  
Cross Sectional ◽  
Effective Tax Rates ◽  
Accounting Data ◽  
Content Type ◽  
Tax Rate ◽  
Objective Evidence ◽  
New Perspective ◽  
Convergence Trend

Purpose This study aims to explore the evidence of the probability of firms’ tax avoidance and the downward convergence trend of national statutory tax rates and firms’ effective tax rates. Design/methodology/approach This research employs exploratory data analysis using interactive data manipulation and visualization tools, namely, R with SparkR, dplyr, ggplot2 and googleVis (GeoChart and Motion Chart) packages. This analysis is based on the world-scale accounting data of all listed firms from 148 countries spanning 30 years. Findings The results reveal the following: three types of evidences on probability of firms’ tax avoidance, showing a non-random distribution of firms’ effective tax rates and return on assets, cross-sectional variation of firms’ effective tax rates in each country, and the trend of difference between effective tax rates and statutory tax rates, and the downward convergence trend of statutory tax rates and firms’ effective tax rates. Practical implications The results highlight the prominent issues of world-scale tax avoidance and tax rate competition and facilitate a collaborative discussion between laymen and professionals using objective evidence. Originality/value A novel methodology is adopted through the visualization of world-scale accounting data, which can facilitate a new perspective, revealing unexpected patterns and trends in otherwise hidden information. This study also highlights the importance of global consideration of firms’ tax avoidance and tax rate competition, using objective evidence.

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