No abstract

We provide archival evidence on firms' book-tax reporting differences using tax return data on public and private manufacturing firms. Prior research suggests that managers should report conforming book income to minimize tax-related costs. However, reporting conformity can also impose nontax costs. We find evidence that public firms have generally higher financial-reporting costs that result in larger book-tax differences. In addition, we find that higher debt levels impose greater nontax costs on firms that are privately held or more financially distressed. Finally, our tests of differences among public firms suggest that nontax costs associated with bonus plan thresholds and book income patterns affect their book-tax reporting. Our tests extend prior studies that focus on whether firms engage in specific conforming transactions. From a tax policy perspective, our results suggest that book-tax differences may be a less useful indicator of private firms' aggressive tax positions because they have fewer incentives to report nonconforming book income.

Using a matched sample of financial data on foreign multinationals and confidential income tax return data on U.S. foreign-controlled corporations (FCCs) during 1987-1996, we examine whether the tax incentives of foreign multinationals influence their U.S. tax reporting. We find that foreign multinationals with relatively low average foreign tax rates report less taxable income and use more debt in their FCCs than those with relatively high average foreign tax rates. Our findings provide insights regarding the complex reporting behavior of FCCs and have implications for U.S. tax policy.

We examine whether tax incentives influence where U.S. multinationals locate their interest deductions worldwide. Our sample includes international bond offerings by U.S. multinationals during 1987–1997 denominated in the currencies of Australia, Canada, France, Germany, Italy, Japan, or the United Kingdom. Our results suggest that U.S. multinationals’ debt location decisions take into account the effect of jurisdiction‐specific tax‐loss carryforwards and binding foreign tax credit limitations on the value of debt tax shields. Our results are also consistent with U.S. multinationals locating interest deductions in different tax jurisdictions as a mechanism to achieve tax‐motivated income shifting.

We match large U.S. corporations' tax returns during 1989-2001 to their financial statements to construct a firm-level proxy of firms' use of off-balance sheet and hybrid debt financing. We find that firms with less favorable prior-period Standard & Poor's (S&P) bond ratings or higher leverage ratios in comparison to their industry report greater amounts of interest expense on their tax returns than to investors and creditors on their financial statements. These between-firm results are consistent with credit-constrained firms using more structured financing arrangements. Our within-firm tests also suggest that firms use more structured financing arrangements when they enter into contractual loan agreements that provide incentives to manage debt ratings. Specifically, we find that after controlling for S&P bond rating and industry-adjusted leverage, our sample firms report greater amounts of interest expenses for tax than for financial statement purposes when they enter into performance pricing contracts that use senior debt rating covenants to set interest rates. Furthermore, we find that the greatest book-tax reporting changes occur when firms become closer to violating these debt rating covenants. These latter findings are consistent with firms' contractual debt covenants influencing their use of off-balance sheet and hybrid debt financing. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2005.