The Impact of Tax Haven Use on Tax Accrual Quality

Stephanie Walton


A firm’s decision to utilize subsidiaries in tax haven jurisdictions is often a complexity increasing, discretionary, tax planning choice. Adding to the tax haven debate, this study examines the relationship between tax haven use and tax accrual quality—i.e., the degree of mapping between cash tax payments and tax expense (Choudhary et al., 2016). While tax haven use is not found to directly impact tax accrual quality, all tax havens are not created equal. Based on signaling theory, firms could use tax accrual quality to signal their intentions to external stakeholders when the subsidiary jurisdiction is a low-quality information environment. Using the Financial Secrecy Index (FSI) to capture the information environment quality of a firm’s subsidiaries, I find a positive association between tax haven use and tax accrual quality. That is, tax haven use can assist in decreasing the level of managerial tax accrual estimation error being made despite the fact that tax haven activities are associated with additional complexity.

Keywords: Tax Havens, Subsidiaries, Tax Accrual Quality, Information Environment, Management Estimation Error, Jurisdictions.

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