Email this article The Impact of Tax Haven Use on Tax Accrual Quality
Abstract
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.
Full Text:
PDFReferences
Akamah, H., Hope, O.-K., & Thomas, W. B. (2018). Tax havens and disclosure aggregation. Journal of International Business Studies, 49, 49-69. https://doi.org/10.1057/s41267-017-0084-x
Atwood, T. J., Drake, M. S., & Myers, L. A. (2010). Book-tax conformity, earnings persistence and the association between earnings and future cash flows. Journal of Accounting and Economics, 50(1),111-125. https://doi.org/10.1016/j.jacceco.2009.11.001
Ayers, B. C., Jiang, J., & Laplante, S. K. (2009). Taxable income as a performance measure: The effects of tax planning and earnings quality. Contemporary Accounting Research, 26(1), 15-54. https://doi.org/10.1506/car.26.1.1
Balakrishnan, K., Blouin, J. L., & Guay, W. R. (2019). Tax aggressiveness and corporate transparency. The Accounting Review, 94(1), 45-69. https://doi.org/10.2308/accr-52130
Barford, V., & Holt, G. (2013, May 23). Google, Amazon, Starbucks: The rise of ‘tax shaming’. BBC News Magazine. https://www.bbc.co.uk/news/magazine-20560359
Beardsley, E. L., Mayberry, M. A,, & McGuire, S. T. (2020). Street vs. GAAP: Which effective tax rate is more informative? Contemporary Accounting Research, 38(2), 1310-1340. https://doi.org/10.1111/1911-3846.12651
Bennedsen, M., & Zeume, S. (2016). Corporate tax havens and transparency (Ross School of Business Working Paper No, 1272). Ann Arbor, MI: University of Michigan.
Blaylock, B., Shevlin, T., & Wilson, R. J. (2012). Tax avoidance, large positive temporary book- tax differences, and earnings persistence. The Accounting Review, 87(1), 91-120. https://doi.org/10.2308/accr-10158
Burks, J. J., Randolph, D. W., & Seida, J. A. (2019). Modeling and interpreting regressions with interactions. Journal of Accounting Literature, 42, 61-79. https://doi.org/10.1016/j.acclit.2018.08.001
Choudhary, P., Koester, A., & Pawlewicz, R. J. (2022). Tax non-audit services and client income tax estimation error. Auditing: A Journal of Practice & Theory, 41(2), 113-139. https://doi.org/10.2308/AJPT-2020-071
Choudhary, P., Koester, A., & Shevlin, T. (2016). Measuring income tax accrual quality. Review of Accounting Studies, 21(1), 89-139. https://doi.org/10.1007/s11142-015-9336-9
Clarke-Billings, L. (2016, April 6). Panama Papers: Top ten tax havens – where the money is hidden. Newsweek. http://www.newsweek.com/panama-papers-top-ten-tax- havens-where-money-hidden-444512
Desai, M. A., & Dharmapala, D. (2006). Corporate tax avoidance and high-powered incentives. Journal of Financial Economics, 79(1), 145-179. https://doi.org/10.1016/j.jfineco.2005.02.002
Dyreng, S. D., Hanlon, M., & Maydew, E. L. (2012). Where do firms manage earnings? Review of Accounting Studies, 17(3), 649-687. https://doi.org/10.1007/s11142-012-9194-7
Dyreng, S. D., Hoopes, J. L., Langetieg, P., & Wilde, J. H. (2020). Strategic subsidiary disclosure. Journal of Accounting Research, 58(3), 643-692. https://doi.org/10.1111/1475-679X.12308
Dyreng, S. D., Hoopes, J. L., & Wilde, J. H. (2016). Public pressure and corporate tax behavior. Journal of Accounting Research, 54(1), 147-186. https://doi.org/10.1111/1475-679X.12101
Dyreng, S. D., & Lindsey, B. P. (2009). Using financial accounting data to examine the effect of foreign operations located in tax havens and other countries on U.S. multinational firms’ tax rates. Journal of Accounting Research, 47(5), 1283-1316. https://doi.org/10.1111/j.1475-679X.2009.00346.x
EY. (2017, September 25.). SEC reporting update: 2017 trends in SEC comment letters (No. 2017/01). https://www.fredlaw.com/assets/htmldocuments/uploads/2018/10/wds30d.pdf
Fan, N. (2008). A study of foreign earnings management using an empirical distribution approach [Doctoral dissertation, University of Texas at Arlington]. CiteSeerx. https://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.322.1252
Fernández Campbell, A. (2016, April 14). The cost of corporate tax avoidance. The Atlantic. https://www.theatlantic.com/business/archive/2016/04/corporate-tax-avoidance/478293/
Financial Accounting Foundation. (2012). Post-implementation review report on FASB interpretation No. 48, Accounting for uncertainty in income taxes. Norwalk, CT: Financial Accounting Foundation.
Financial Accounting Foundation. (2013). Post-implementation review report on FASB statement no. 109, Accounting for income taxes. Norwalk, CT: Financial Accounting Foundation.
Financial Accounting Standards Board. (2016, July 26).
Proposed accounting standards update – Income taxes (Topic 740) disclosure framework – Disclosure requirements for income taxes. Norwalk, CT: Financial Accounting Foundation.
Francis, J., LaFond, R., Olsson, P., & Schipper, K. (2005). The market pricing of accruals quality. Journal of Accounting and Economics, 39(2), 295-327. https://doi.org/10.1016/j.jacceco.2004.06.003
Gleason, C. A., & Mills, L. F. (2011). Do auditor‐provided tax services improve the estimate of tax reserves? Contemporary Accounting Research, 28(5), 1484-1509. https://doi.org/10.1111/j.1911-3846.2010.01057.x
Graham, J. R., Raedy, J. S., & Shackelford D. A. (2012). Research in accounting for income taxes. Journal of Accounting and Economics, 53(1), 412-434. https://doi.org/10.1016/j.jacceco.2011.11.006
Graham, J. R., & Tucker, A. L. (2006). Tax shelters and corporate debt policy. Journal of Financial Economics, 81(3), 563-594. https://doi.org/10.1016/j.jfineco.2005.09.002
Hanlon, M. (2005). The persistence and pricing of earnings, accruals, and cash flows when firms have large book-tax differences. The Accounting Review, 80(1), 137-166. https://doi.org/10.2308/accr.2005.80.1.137
Hanlon, M., & Heitzman, S. (2010). A review of tax research. Journal of Accounting and Economics, 50(2-3), 127-178. https://doi.org/10.1016/j.jacceco.2010.09.002
Hanlon, M., & Slemrod, J. (2009). What does tax aggressiveness signal? Evidence from stock price reactions to news about tax shelter involvement. Journal of Public Economics, 93(1), 126-141. https://doi.org/10.1016/j.jpubeco.2008.09.004
Heckman, J. J. (1979). Sample selection bias as a specification error. Econometrica, 47(1), 153-161. https://doi.org/10.2307/1912352
Hines Jr., J. R., & Rice, E. M. (1994). Fiscal paradise: Foreign tax havens and American business. The Quarterly Journal of Economics, 109(1), 149-182. https://doi.org/10.2307/2118431
Holzer, J. (2013, May 22). From Google to FedEx: The incredible vanishing subsidiary. The Wall Street Journal. https://www.wsj.com/articles/SB10001424127887323463704578497290099032374
Hope, O.-K., Kang, T., Thomas, W. B., & Vasvari, F. (2008). Pricing and mispricing effects of SFAS 131. Journal of Business Finance & Accounting, 35(3-4), 281-306. https://doi.org/10.1111/j.1468-5957.2007.02071.x
Hope, O.-K., Ma, M., & Thomas, W. B. (2013). Tax avoidance and geographic earnings disclosure. Journal of Accounting and Economics, 56(2-3), 170-189. https://doi.org/10.1016/j.jacceco.2013.06.001
Kinney Jr., W. R., Palmrose, Z.-V., & Scholz, S. (2004). Auditor independence, non‐audit services, and restatements: Was the U.S. government right? Journal of Accounting Research, 42(3), 561-588. https://doi.org/10.1111/j.1475-679X.2004.t01-1-00141.x
Klassen, K. J., & Laplante, S. K. (2012). Are U.S. multinational corporations becoming more aggressive income shifters? Journal of Accounting Research, 50(5), 1245-1285. https://doi.org/10.1111/j.1475-679X.2012.00463.x
Krull, L. K. (2004). Permanently reinvested foreign earnings, taxes, and earnings management. The Accounting Review, 79(3), 745-767. https://doi.org/10.2308/accr-51433
Kubick, T. R., Lynch, D. P., Mayberry, M. A., & Omer, T. C. (2016). The effects of regulatory scrutiny on tax avoidance: An examination of SEC comment letters. The Accounting Review, 91(6), 1751-1780. https://doi.org/10.2308/accr-51433
Lewellen, C. (2016). Tax haven incorporation and financial reporting transparency [Doctoral dissertation, Florida State University]. Diginole. http://purl.flvc.org/fsu/fd/FSU_2016SP_Lewellen_fsu_0071E_13085
Lewellen, C., Mauler, L., & Watson, L. (2021). Tax haven incorporation and the cost of capital. Contemporary Accounting Research, 38(4), 2982-3016. https://doi.org/10.1111/1911-3846.12703
Linebaugh, K., Thurm, S., & Lessin, J. E. (2013, May 21). Apple tax bill overstated to investors. The Wall Street Journal. https://www.wsj.com/articles/SB10001424127887323463704578497642576416274
Lisowsky, P. (2010). Seeking shelter: Empirically modeling tax shelters using financial statement information. The Accounting Review, 85(5), 1693-1720. https://doi.org/10.2308/accr.2010.85.5.1693
O’Donovan, J., Wagner, H. F., & Zeume, S. (2019). The value of offshore secrets: Evidence from the Panama Papers. The Review of Financial Studies, 32(11), 4117-4155. https://doi.org/10.1093/rfs/hhz017
Peretti, J. (2016, January 18). The Cayman Islands – home to 100,000 companies and the £8.50 packet of fish fingers. The Guardian. https://www.theguardian.com/us-news/2016/jan/18/the-cayman-islands-home-to-100000-companies-and-the-850-packet-of-fish-fingers
Phillips, J. D. (2003). Corporate tax-planning effectiveness: The role of compensation-based incentives. The Accounting Review, 78(3), 847-874. https://doi.org/10.2308/accr.2003.78.3.847
Robinson, D. (2008). Auditor independence and auditor-provided tax service: Evidence from going-concern audit opinions prior to bankruptcy filings. Auditing: A Journal of Practice & Theory, 27(2), 31-54. https://doi.org/10.2308/aud.2008.27.2.31
Schmal, F., Schulte Sasse, K., & Watrin, C. (2021). Trouble in paradise? Disclosures after tax haven leaks. Journal of Accounting, Auditing, and Finance. Advance online publication. https://doi.org/10.1177/0148558X20986348
Shipman, J. E., Swanquist, Q. T., & Whited, R. L. (2017). Propensity score matching in accounting research. The Accounting Review, 92(1), 213-244. https://doi.org/10.2308/accr-51449
Spence, M. (1973). Job market signaling, Quarterly Journal of Economics, 87(3), 355-374. https://doi.org/10.2307/1882010
Tax Justice Network. (2016). Financial secrecy index. http://www.financialsecrecyindex.com
Tax Justice Network. (2010-2022). Frequently asked questions. http://www.taxjustice.net/faq/
Taylor, G., Richardson, G., & Lanis, R. (2015). Multinationality, tax havens, intangible assets, and transfer pricing aggressiveness: An empirical analysis. Journal of International Accounting Research, 14(1), 25-57. https://doi.org/10.2308/jiar-51019
Thomas, W. B. (1999). A test of the market's mispricing of domestic and foreign earnings. Journal of Accounting and Economics, 28(3), 243-267. https://doi.org/10.1016/S0165-4101(00)00007-0
Whalen, D., Usvyatsky, O., & Tanona, D. (2014). Financial restatements: A thirteen year comparison. Sutton, MA: Audit Analytics.
Wilson, R. J. (2009). An examination of corporate tax shelter participants. The Accounting Review, 84(3), 969-999. https://doi.org/10.2308/accr.2009.84.3.969
The World Bank (n.d.). Rule of law. http://info.worldbank.org/governance/wgi/pdf/rl.pdf
Refbacks
- There are currently no refbacks.
Copyright © Journal of Tax Administration. All rights reserved. | Hosted by Docuracy Ltd | Powered by Open Journal Systems
