Instilling Subpart F with Horizontal Equity as Applicable to Individual U.S. Shareholders

2019 ◽  
Vol 18 (1) ◽  
pp. 1-18
Author(s):  
Irwin J. (Jay) Katz
Keyword(s):  
Tax Avoidance ◽  
Horizontal Equity ◽  
Tax Neutrality ◽  
Internal Revenue ◽  
Tax Shelters ◽  
New Type ◽  
Foreign Corporations

ABSTRACT Subpart F of the Internal Revenue Code is a body of anti-abuse provisions designed to prevent U.S. shareholders from avoiding tax on the earnings (Subpart F income) generated by foreign corporations they control. Overall, its provisions lack the tax principle of horizontal equity based on tax neutrality. This article will expose the lack of horizontal equity, as applied to individual (not corporate) U.S. shareholders, by being both over-inclusive and under-inclusive. It is over-inclusive in imposing punitive tax consequences when tax avoidance is unachievable, including the taxation of GILTI, a new type of Subpart F income. It is under-inclusive because tax avoidance is achievable by taking advantage of certain loopholes in Subpart F. Using IRC §469 (that successfully eliminated tax shelters) as a model, this article recommends revisions to relevant Subpart F provisions that will eliminate tax avoidance without punitive tax consequences and also foreclose potential tax avoidance opportunities.

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 Institutional Ownership and Corporate Tax Avoidance: New Evidence

2016 ◽  
Vol 92 (2) ◽  
pp. 101-122 ◽  
Author(s):  
Mozaffar Khan ◽  
Suraj Srinivasan ◽  
Liang Tan
Keyword(s):  
Tax Avoidance ◽  
Institutional Ownership ◽  
Regression Discontinuity Design ◽  
Corporate Tax ◽  
Profit Margins ◽  
Exogenous Shocks ◽  
Analyst Expectations ◽  
Tax Shelters ◽  
New Evidence ◽  
Shed Light

ABSTRACT We provide new evidence on the agency theory of corporate tax avoidance (Slemrod 2004; Crocker and Slemrod 2005; Chen and Chu 2005) by showing that increases in institutional ownership are associated with increases in tax avoidance. Using the Russell index reconstitution setting to isolate exogenous shocks to institutional ownership, and a regression discontinuity design that facilitates sharper identification of treatment effects, we find a significant and discontinuous increase in tax avoidance following Russell 2000 inclusion. The tax avoidance involves the use of tax shelters, and immediate benefits include higher profit margins and likelihood of meeting or beating analyst expectations. Collectively, the results shed light on the effect of increased ownership concentration on tax avoidance.

scholarly journals Transfer Pricing As A Vehicle In Corporate Tax Avoidance

2016 ◽  
Vol 33 (1) ◽  
pp. 9-16 ◽  
Author(s):  
Joel Barker ◽  
Kwadwo Asare ◽  
Sharon Brickman
Keyword(s):  
Transfer Pricing ◽  
Tax Avoidance ◽  
Tax Rates ◽  
Corporate Tax ◽  
Internal Revenue ◽  
Tax Reduction ◽  
Arm’S Length Principle ◽  
Corporate Tax Rates ◽  
Foreign Affiliates ◽  
Regulatory Bodies

Using transfer pricing, U.S. Corporations are able to transfer revenues to foreign affiliates with a lower corporate tax rates.  The Internal Revenue Code requires intercompany transactions to comply with the “Arm’s Length Principle” in order to prevent tax avoidance.   We describe and use elaborate examples to explain how US companies exploit flexibility in the tax code to employ transfer pricing and related tax reduction and avoidance methods. We discuss recent responses by regulatory bodies.

scholarly journals The Usefulness Of The Tax Avoidance Proxy: Evidence From Korea

2016 ◽  
Vol 32 (2) ◽  
pp. 607
Author(s):  
Hyun-Ah Lee
Keyword(s):  
Financial Reporting ◽  
Tax Avoidance ◽  
Tax Planning ◽  
Large Set ◽  
Tax Shelters ◽  
Simultaneous Management ◽  
Tax Reporting ◽  
Tax Costs

This study aims to verify the usefulness of the tax avoidance proxy developed by Desai and Dharmapala (2006) in the setting where accounting-tax alignment is relatively high and aggressive tax planning is restricted. By using a large set of firms in Korea, I empirically test whether the tax avoidance proxy detects the management of book-tax and book-only accruals. My findings show that downward management of book-tax accruals for tax reporting purposes is not detected by the tax avoidance proxy. However, upward management of book-only accruals for financial reporting purposes is captured by the tax avoidance proxy. In addition, the tax avoidance proxy better detects simultaneous management of two accrual components than management of book-tax accruals alone. Lastly, the tax avoidance proxy is more powerful in detecting tax avoidance activities in a sample of firms with high tax and financial reporting costs than in firms that carry high tax costs but low financial reporting costs. The results of this study imply that the tax avoidance proxy can be a good indicator only when used for firms that are conscious of their financial reporting costs and have incentive to manage both taxable and book income at the same time under the setting where book-tax conformity is high and aggressive tax shelters are restricted. This study sheds light on the usefulness of the tax avoidance proxy which has been widely used in the accounting studies and provides a caveat to researchers that the proxy should be employed with caution and in appropriate setting. 

CEO Narcissism and Corporate Tax Sheltering

2015 ◽  
Vol 38 (1) ◽  
pp. 1-22 ◽  
Author(s):  
Kari Joseph Olsen ◽  
James Stekelberg
Keyword(s):  
Tax Avoidance ◽  
Personality Characteristics ◽  
Corporate Tax ◽  
Firm Level ◽  
Aggressive Form ◽  
Individual Personality ◽  
Tax Shelters ◽  
Behavioral Tendencies ◽  
The Individual ◽  
Ceo Narcissism

ABSTRACT We examine the effect of CEO narcissism on an especially aggressive form of corporate tax avoidance: tax sheltering. Narcissism is a multifaceted personality trait associated with a sense of superiority and a propensity to engage in questionable behavior. Narcissists feel that they are above the law and are aggressive in pursuing what they believe is theirs. Narcissists also possess heightened motivations to pursue rewards or desirable outcomes while only being weakly motivated to avoid negative outcomes. Consistent with these behavioral tendencies of narcissistic individuals, we document statistically and economically significant effects of CEO narcissism on the likelihood that the CEO's firm engages in corporate tax shelters. Our study contributes to the literature by documenting a mechanism through which the individual personality characteristics of the CEO can affect firm-level tax policies. JEL Classifications: H25; H26; M41.

scholarly journals The Corporate Response to Government Attacks on Tax Shelters

2016 ◽  
Vol 8 (1) ◽  
pp. 126
Author(s):  
Noel P. Brock ◽  
Edward J. Schnee ◽  
Shane R. Stinson
Keyword(s):  
Tax Reform ◽  
Tax Avoidance ◽  
Discretionary Accruals ◽  
Corporate Tax ◽  
Corporate Response ◽  
Audit Firms ◽  
Tax Shelters ◽  
Corporate Tax Reform ◽  
Prior Literature ◽  
New Evidence

We examine the effectiveness of four federal government actions, all of which were designed to curb the proliferation of corporate tax shelters dating back to the 1990s, at eliciting measurable changes in characteristics commonly associated with tax shelter firms. Our results suggest that the government’s initial attacks on corporate tax shelters in the early 2000s elicited significant declines in book-tax differences, discretionary accruals, and the use of Big N audit firms, which contributed to gradual reductions in the estimated likelihood of tax sheltering for both multinational and purely domestic firms. Conversely, later attempts to discourage corporate tax shelters proved ineffective, likely due in part to the effectiveness of previous government attacks and a faltering economy. This study addresses calls from prior literature for a better understanding of factors determining corporate tax avoidance and offers new evidence of multi-faceted taxpayer reactions to corporate tax reform.

scholarly journals Social networks and tax avoidance: evidence from a well-defined Norwegian tax shelter

2019 ◽  
Vol 26 (6) ◽  
pp. 1291-1328 ◽  
Author(s):  
Annette Alstadsæter ◽  
Wojciech Kopczuk ◽  
Kjetil Telle
Keyword(s):  
Social Networks ◽  
Social Interactions ◽  
Causal Effect ◽  
Behavioral Responses ◽  
Tax Avoidance ◽  
Capital Gains ◽  
Family Networks ◽  
Tax Shelter ◽  
Tax Shelters ◽  
Set Up

AbstractIn 2005, over 8% of Norwegian shareholders transferred their shares to new (legal) tax shelters intended to defer taxation of capital gains and dividends that would otherwise be taxable in the aftermath of a reform implemented in 2006. Using detailed administrative data, we identify family networks and describe how take-up of tax avoidance progresses within a network. A feature of the reform was that the eligibility to set up a tax shelter changed discontinuously with individual shareholding of a firm and we use this fact to estimate the causal effect of availability of tax avoidance for a taxpayer on tax avoidance by others in the network. We find that eligibility in a social network increases the likelihood that others will take-up. This suggests that taxpayers affect each other’s decisions about tax avoidance, highlighting the importance of accounting for social interactions in understanding enforcement and tax avoidance behavior, and providing a concrete example of optimization frictions in the context of behavioral responses to taxation.

Investment Opportunity Sets, Operating Uncertainty, and Capital Market Pressure: Determinants of Investments in Tax Shelter Activities?

2013 ◽  
Vol 36 (1) ◽  
pp. 1-26 ◽  
Author(s):  
Sean T. McGuire ◽  
Thomas C. Omer ◽  
Jaron H. Wilde
Keyword(s):  
Capital Market ◽  
Tax Avoidance ◽  
Investment Strategy ◽  
Data Availability ◽  
Investment Behavior ◽  
Investment Opportunity ◽  
Opportunity Sets ◽  
Tax Shelter ◽  
Tax Shelters ◽  
Market Pressure

ABSTRACT Prior research documents substantial variation in firms' tax avoidance activities and questions why some firms choose not to take advantage of the apparent benefits of tax planning (i.e., the “undersheltering puzzle”). We provide additional insight into the undersheltering puzzle by investigating the decision to invest in a tax shelter from the perspective of a firm's overall investment strategy. We examine whether three factors associated with traditional investment behavior (firms' investment opportunity sets, operating uncertainty, and capital market pressure) are also associated with investments in tax shelter activities. Our results suggest that firms with large investment opportunity sets and higher operating uncertainty are less likely to invest in tax shelters. We also find that firms with greater capital market pressure are more likely to invest in tax sheltering activities. Overall, we find that factors that influence firms' investment behavior help to explain why more firms do not invest in tax shelters. Data Availability: All data used in this study are available from publicly available sources identified in the manuscript. JEL Classifications: H25, H26, M41

scholarly journals Tax Shelters Sound Strategy Or Dangerous Game?

2011 ◽  
Vol 4 (4) ◽  
Author(s):  
Paul Masar ◽  
Scott Butterfield
Keyword(s):  
At Risk ◽  
Home Ownership ◽  
Internal Revenue Service ◽  
Retirement Plans ◽  
Internal Revenue ◽  
Tax Shelter ◽  
Tax Shelters ◽  
Activity Loss

Tax shelters, once thought to be extinct due to the at-risk and passive activity loss rules, continue to appeal to corporations and wealthy individuals.  While some legal activities such as owning your own business, home ownership, retirement plans, and like-kind or section 1031 exchanges may allow you to “shelter” income, some individuals and organizations continue to invest in schemes that the Internal Revenue Service finds unacceptable.  Known as abusive tax shelters, the IRS issued a new set of regulations on February 28, 2003 in an attempt to identify these transactions, and ultimately, end their use by taxpayers.  This article provides an overview of tax shelters, highlights some of the more famous tax shelter scandals, and provides guidance on the rules surrounding the use of tax shelters.

Sign in / Sign up

Export Citation Format

Share Document