Taxes and Financial Constraints: Evidence from Linguistic Cues

Law, Kelvin; Mills, Lillian F.

doi:10.1111/1475-679x.12081

Cited by 295 publications

(117 citation statements)

References 124 publications

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“…Regarding the remaining variables, we find that almost 84 percent of our respondent firms have experience with tax havens ( TAX_HAVEN ). Although this value seems high (e.g., Dyreng and Lindsey () report 60 percent of their firm‐years have a material subsidiary in a tax haven country, and Law and Mills () report 65 percent), our respondent firms are all multinationals and typically very large. In fact, approximately half our sample firms file country‐level consolidated tax returns in over 10 countries.…”

Section: Consequences Of Firms’ Transfer Pricing Strategiesmentioning

confidence: 84%

Transfer Pricing: Strategies, Practices, and Tax Minimization

Klassen

Lisowsky

Mescall

2016

Contemporary Accting Res

128

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Using a survey of tax executives from multinational corporations, we document that some firms set their transfer pricing strategy to minimize tax payments, but more firms focus on tax compliance. We estimate that a firm focusing on minimizing taxes has a GAAP effective tax rate that is 6.6 percentage points lower and generates about $43 million more in tax savings, on average, than a firm focusing on tax compliance. Available COMPUSTAT data on sample firms confirm our surveybased inferences. We also find that transfer pricing-related tax savings are greater when higher foreign income, tax haven use, and R&D activities are combined with a tax minimization strategy. Finally, compliance-focused firms report lower FIN 48 tax reserves than tax-minimizing firms, consistent with the former group using less uncertain transfer pricing arrangements. Collectively, our study provides direct evidence that multinational firms have differing internal priorities for transfer pricing, and that these differences are strongly related to the taxes reported by these firms.Prix de transfert : strat egies, pratiques et r eduction maximale de l'impôt R ESUM E A l'aide d'un sondage r ealis e aupr es des chefs de services de fiscalit e de soci et es multinationales, les auteurs etayent l'hypoth ese selon laquelle les soci et es qui etablissent leur strat egie en mati ere de prix de transfert visent parfois la r eduction maximale de l'impôt qu'elles ont a payer, mais plus souvent le respect de leurs obligations fiscales. Les auteurs estiment qu'une soci et e qui vise la r eduction maximale de l'impôt pr esente, en moyenne, un taux d'imposition effectif en conformit e avec les PCGR inf erieur de 6,6 points de pourcentage et environ 43 millions de dollars de plus en economies fiscales g en er ees qu'une soci et e qui vise le respect de ses obligations fiscales. Les donn ees COMPUSTAT disponibles sur les soci et es de l' echantillon confirment les inf erences reposant sur les r esultats de ce sondage. Les auteurs constatent egalement que les economies fiscales li ees aux prix de transfert sont plus

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Section: Consequences Of Firms’ Transfer Pricing Strategiesmentioning

confidence: 84%

Transfer Pricing: Strategies, Practices, and Tax Minimization

Klassen

Lisowsky

Mescall

2016

Contemporary Accting Res

128

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“…). Although firms with financial constraints could conceivably have fewer resources for tax planning also, concurrent tax research argues and finds that firms with financial constraints report higher levels of tax avoidance, as they substitute tax savings for the lack of external financing (e.g., Edwards, Schwab, and Shevlin ; Law and Mills ). Thus, I expect that financial constraints are associated with higher tax avoidance (i.e., SA_INDEX will be negatively associated with CASH_ETR ).…”

Section: Sample Selection and Research Designmentioning

confidence: 99%

Tax Avoidance and the Implications of Weak Internal Controls

Bauer

2015

Contemporary Accting Res

135

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I examine whether corporate tax avoidance is associated with internal control weaknesses (ICWs) disclosed under the Sarbanes-Oxley Act (SOX). ICWs disclosed under SOX are frequently related to a firm's tax function. When pervasive ICWs exist, the likelihood increases that these frequent tax-related ICWs spill over from financial reporting issues to tax avoidance objectives. Thus, my research helps corporate stakeholders understand the implications of internal controls beyond simply financial reporting objectives. Results indicate that, on average, firms with a tax-related ICW have a 4 percent higher three-year cash effective tax rate relative to firms without any such weaknesses. Further estimates reveal that this negative relation stems from pervasive, company-level tax ICWs. Analysis of remediation suggests a causal link. I find that after remediating tax-related ICWs, firms report higher levels of tax avoidance in the future. Broadly, these findings support that internal control quality represents a proxy for internal governance, and thus the strength of alignment between managers and shareholders. Furthermore, tax-related internal controls represent an important underlying determinant of tax avoidance with significant cash flow effects, and implications beyond financial reporting. * Accepted by Lillan Mills. I am grateful for the helpful advice and suggestions of my dissertation committee: Jee-Hae Lim, Alan Macnaughton, Anindya Sen and especially my chair, Ken Klassen. I am also indebted to Tim Bauer, James Chyz, Cristi Gleason and Louise Hayes for their wonderful insight and assistance. This paper has also benefited greatly from the comments of Lillian Mills and two anonymous refereescause a effet. L'auteur constate qu'apr es avoir rem edi e aux DCI li ees a la fonction fiscale, les soci et es affichent ult erieurement des niveaux d'optimisation fiscale sup erieurs. De fac ßon g en erale, ces observations viennent etayer le fait que la qualit e du contrôle interne est une variable de substitution a la gouvernance interne et confirment donc l'ad equation des int erêts des gestionnaires et des actionnaires. Plus encore, les contrôles internes li es a la fonction fiscale sont un important d eterminant de l'optimisation fiscale qui a des r epercussions importantes sur les flux de tr esorerie et dont les cons equences d epassent l'information financi ere. 450 Contemporary Accounting Research CAR Vol. 33 No. 2 (Summer 2016)trols (COSO 2011)-and include weak risk management, lack of key personnel, inadequate communication, "tone at the top," etc. 3 While related to financial reporting of tax provisions, valuation allowances, and other reserves specifically, these ICWs could translate into missed tax-avoidance opportunities. Conversely, they could also reflect inaccurate evaluation of tax jurisdictions and other planning inputs yet to be discovered by tax authorities, or opportunities for management to extract rents. Consequently, I hypothesize that taxrelated ICWs reflect a lack of internal governance for the tax f...

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“…Several studies have investigated the effects of nontax features on firm-level tax avoidance. For example, Law and Mills [14] and Edwards et al [15] recognize that financially constrained firms participate in tax planning as a way to secure funds. Under an international setting, Riahi-Belkaoui [16] and Picur and Riahi-Belkaoui [17] find that competition laws, economic freedom, the importance of equity markets, the incidence of violent crimes, bureaucracy levels, corruption control and tax morale are related to tax compliance.…”

Section: National Culture and Tax Avoidancementioning

confidence: 99%

National Culture and Tax Avoidance of Multinational Corporations

Yoo

Lee

2019

Sustainability

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This study tests the role of national culture in tax avoidance by multinational corporations (MNCs). Hofstede’s four cultural dimensions are used to measure cultural differences across countries: uncertainty avoidance, individualism, masculinity, and power distance. The empirical results of the study imply that MNCs headquartered in countries with low uncertainty avoidance, low individualism, high masculinity, and low power distance engage in a higher level of tax avoidance than MNCs in countries with high uncertainty avoidance, high individualism, low masculinity, and high power distance. In addition, the cultural features of the parent company generally have a stronger influence on group-level tax avoidance than those of its subsidiaries. This study contributes to the literature by presenting empirical evidence of culture as a determinant of tax avoidance by MNCs.

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Taxes and Financial Constraints: Evidence from Linguistic Cues

Cited by 295 publications

References 124 publications

Transfer Pricing: Strategies, Practices, and Tax Minimization

Transfer Pricing: Strategies, Practices, and Tax Minimization

Tax Avoidance and the Implications of Weak Internal Controls

National Culture and Tax Avoidance of Multinational Corporations

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