Lost in Translation: Detecting Tax Shelter Activity in Financial Statements

McGill, Gary A.; Outslay, Edmund

doi:10.17310/ntj.2004.3.13

Cited by 142 publications

(64 citation statements)

References 13 publications

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“…Yet, it is well known that there are many problems with computing estimates of taxable income from financial statements. Hanlon (2003) and McGill and Outslay (2004) and others discuss and show the potential issues in conducting such an exercise. In essence, there is a lack of disclosure in financial statements about taxable income and/or the actual cash taxes paid or to be paid on the current year's earnings.…”

Section: Measuring Tax Avoidancementioning

confidence: 99%

A review of tax research

Hanlon¹,

Heitzman²

2010

Journal of Accounting and Economics

2,139

646

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Abstract:In this paper, we present a review of tax research. We survey four main areas of the literature: 1) the informational role of income tax expense reported for financial accounting, 2) corporate tax avoidance, 3) corporate decision-making including investment, capital structure, and organizational form, and 4) taxes and asset pricing. We summarize the research areas and questions examined to date and what we have learned or not learned from the work completed thus far. In addition, we provide our opinion as to the interesting and important issues for future research. ______________________This paper was prepared for the 2009 Journal of Accounting and Economics Conference. We appreciate comments from Scott Dyreng, Mihir Desai (discussant), S.P. Kothari (editor), John Long, Ed Maydew, Lillian Mills, Tom Omer, Sonja Rego, Doug Shackelford, Terry Shevlin, Joel Slemrod, Cliff Smith, David Weber, Ryan Wilson, Jerry Zimmerman, George Zodrow, and conference participants at the JAE Conference as well as at the 2009 University of North Carolina Tax Symposium and the discussant there, Bill Gentry. All errors and omissions are our own. * Corresponding author: 100 Main Street, Cambridge, MA. email: mhanlon@mit.edu. 1 A Review of Tax Research IntroductionIn this paper, we review tax research in accounting as well as tax research in economics and finance to the extent that it is related to or is affected by research in accounting. Shackelford and Shevlin (2001) provide a careful and thorough review of empirical tax research in accounting in the prior Journal of Accounting and Economics review volume. Shackelford and Shevlin limit their review to research published in accounting outlets and describe the development of the relatively young archival, microeconomic-based income tax literature that arose from the Scholes andWolfson framework. In his discussion of the review, Maydew (2001) emphasizes the need for tax researchers in accounting to think more broadly and to incorporate more theory and evidence from economics and finance. We agree. Tax research has a long history in many disciplines; this fact cannot be ignored. Our goal in this paper is to integrate the theoretical and empirical tax research from accounting, economics, and finance, to summarize what is known and unknown, and to offer suggestions for future research.The multidisciplinary nature of tax research is what makes tax research exciting (yes, exciting), yet difficult. Tax research can be difficult not only because one has to follow tax studies in accounting, finance, economics, and law (through academic institutions, governmental agencies, and policy think tanks), but also because different disciplines often use different languages and have different perspectives. 1 For example, economists generally focus on tax compliance, tax incidence (such as who bears the corporate tax), investment and economic growth effects (such as how taxes 1 Slemrod (1992a) characterizes these differences as economists studying what corporations actually do and accountants stud...

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Section: Measuring Tax Avoidancementioning

confidence: 99%

A review of tax research

Hanlon¹,

Heitzman²

2010

Journal of Accounting and Economics

2,139

646

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“…McGill and Outslay (2004) suggest the analysis of firms' tax footnote rate reconciliations as a one way to uncover tax shelter users. The rate reconciliation details permanent book-tax differences.…”

Section: Congress and Thementioning

confidence: 99%

“…Tax shelter activity is difficult to detect in the financial statements (McGill and Outslay 2004). COLI, like other shelters of the 1990's, is characterized by its ability to create tax savings without substantially impacting the firm's balance sheet accounts.…”

Section: Statement Of Financial Accounting Standards (Sfas) No 109 mentioning

confidence: 99%

“…Therefore, the excess of taxable deductions over non-taxable income generated from participating in a COLI program, if material, should be reported in the rate reconciliation. As an example, the tax footnote rate reconciliation in Sonoco's 1994 10-K shows COLI-related tax benefits of $5.09 million.However, firms have considerable discretion over how permanent differences are netted and aggregated into specific line items on the rate reconciliation.Tax shelter activity is difficult to detect in the financial statements (McGill and Outslay 2004 …”

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confidence: 99%

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The Spread of Aggressive Corporate Tax Reporting: A Detailed Examination of the Corporate-Owned Life Insurance Shelter

Brown

2011

The Accounting Review

194

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This paper investigates the spread of aggressive corporate tax reporting by modeling a firm's decision to adopt the corporate-owned life insurance (COLI) shelter. I use a sample of known COLI participants to examine whether certain firm characteristics are associated with the decision to adopt a COLI shelter. I find some evidence that firms with higher performancematched discretionary accruals are more likely to adopt a COLI shelter, suggesting a positive relation between aggressive financial reporting and aggressive tax reporting. I also find that firms with greater capital market visibility are less likely to adopt a COLI shelter, consistent with a potential reputational cost for being associated with aggressive tax avoidance activities. Further, my results suggest that COLI adopters are generally R&D intensive firms with low leverage and few foreign operations. In addition to firm specific characteristics, I consider two explanations for the spread of COLI adoption motivated by theory on diffusion of innovations and institutional isomorphism. I investigate whether firms imitate prior COLI adopters and whether COLI adoption spreads through common auditors. My results are not consistent with an imitation vii explanation. Further, my results suggest that having the same auditor as a prior COLI adopter does not increase the likelihood that a firm will adopt COLI.viii Table of PART I 6Chapter The tax shelter industry also distorts allocation of economic resources. Tax shelter activity diverts resources away from the government toward accountants, lawyers and others who develop and promote tax shelters. Moreover, according to theories of corporate tax incidence, engaging in a tax shelter cannot make a corporation, per se, better off. The benefits from reducing the corporation's tax bill will ultimately accrue to its shareholders through higher stock prices, its employees through higher wages, or its customers through lower prices. Exactly how the benefits will be shared is unknown, but Slemrod (2004) Frank et al. 2006). 3 However, ETRs and book-tax differences are noisy measures of aggressive tax reporting. ETRs vary with profitability, industry differences in the reporting of revenue and expenses, and legitimate tax planning opportunities. Consequently, it is difficult to distinguish lower ETRs due to better tax planning from those due to aggressive avoidance or shelter activity. List of TablesTreasury's (1999) report suggests that the growing gap between financial statement income and 2 Many studies rely on Bankman's (2004a) working definition of a tax shelter as a "(1) tax motivated; (2) transaction unrelated to a taxpayer's normal business operations; that (3) under a literal reading of some relevant legal authority; (4) produces a loss for tax purposes in excess of any economic loss; (5) in a manner inconsistent with legislative intent or purpose." See also Bankman (1999).3 Graham and Tucker (2006) identify known tax shelter participants. However, their study focuses on firms' debt policy decisions, no...

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“…According to Shevlin (2002), Desai and Dharmapala (2006), Plesko (2004), McGill and Outslay (2004), Tang (2005), and Tang and Firth (2010), the BTD estimate is an effective way to identify tax management in companies, because if book earnings are higher than taxable earnings, there is evidence of tax management to reduce the calculation basis of taxes on earnings.…”

Section: Analysis Of Resultsmentioning

confidence: 99%

Corporate Governance Characteristics as a Stimulus to Tax Management

Gomes

2016

Rev. contab. finanç.

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This article aimed to investigate whether corporate governance uses tax management to increase companies' performance. The objective was checking whether corporate governance characteristics, such as remuneration paid to the executive board, segregation between Chairman and CEO, and the independence and composition of the Board of Directors, influence tax management in Brazilian companies. At the same time, it aimed to identify whether the preceding tax management is reflected on the subsequent tax management. To do this, a sample of 355 Brazilian companies listed on the BM&FBOVESPA between 2008 and 2014 was used, in order to find out whether their corporate governance characteristics influenced tax management, something identified by calculating ETR, CashETR, and BTD. As a result, it was found (i) that the remuneration paid to executives may be regarded as a characteristic influencing tax management in Brazilian firms, and (ii) that the preceding tax management influences the future tax management. In addition, it was found that Brazilian companies do not rule out tax management benefits, since the average effective rate in the sample under analysis was 25%, and it is statistically lower than the nominal rate of taxes on earnings in Brazil, which is 34%.

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Lost in Translation: Detecting Tax Shelter Activity in Financial Statements

Cited by 142 publications

References 13 publications

A review of tax research

A review of tax research

The Spread of Aggressive Corporate Tax Reporting: A Detailed Examination of the Corporate-Owned Life Insurance Shelter

Corporate Governance Characteristics as a Stimulus to Tax Management

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