Using IRS Data to Identify Income Shifting to Foreign Affiliates

Simone, Lisa De; Mills, Lillian F.; Stomberg, Bridget

doi:10.2139/ssrn.2477537

Cited by 8 publications

(5 citation statements)

References 57 publications

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“…Lower power to detect the hybrid strategy could arise because some proxies do not reflect the temporary portion of the hybrid strategy, which lowers the power of tests using these proxies. These results validate the use of alternative proxies specifically designed to detect cross‐jurisdictional income shifting (e.g., Collins et al ; Chen et al ; De Simone et al ; De Simone et al ).…”

Section: Results For Tests Using Hssupporting

confidence: 74%

How Reliably Do Empirical Tests Identify Tax Avoidance?

Simone¹,

Nickerson

Seidman

et al. 2020

Contemporary Accting Res

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Research on the determinants of tax avoidance have relied on tests using GAAP and cash effective tax rates (ETRs) and total and permanent book‐tax differences. Two new proxies have emerged that overcome documented limitations of these proxies: one, developed by Henry and Sansing (2018), allows for more meaningful interpretation of results estimated in samples that include loss observations. The other, reserves for unrecognized tax benefits (UTB), provides new data on tax uncertainty. We offer empirical evidence on how well tests using these new proxies perform relative to those extensively used in prior research. The paper finds that tests using the proxy developed by Henry and Sansing (2018) have lower power relative to those using other proxies across all samples, including a sample that includes loss observations. In contrast, when firms accrue reserves for uncertain tax avoidance, tests using the current‐year addition to the UTB have the highest power across all proxies, samples, and levels of reserves. In the absence of reserves, tests using the GAAP ETR best detect uncertain tax avoidance, on average. This study contributes to the literature by using a controlled environment to provide the first large‐scale empirical evidence on how the power of tests varies with the use of relatively new proxies, the inclusion of loss observations, and the advent of FIN 48.

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Section: Results For Tests Using Hssupporting

confidence: 74%

How Reliably Do Empirical Tests Identify Tax Avoidance?

Simone¹,

Nickerson

Seidman

et al. 2020

Contemporary Accting Res

Self Cite

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show abstract

“…We classify firms as multinational if they have any foreign income over the three‐year period. To measure income mobility, we follow De Simone et al () and calculate a firm‐level composite measure of income mobility based on five equally weighted components: R&D expense, advertising expenditures, gross profit percentage, proportion of foreign sales, and membership in a high‐technology industry. Firms in the highest quintile of the composite measure are classified as income‐mobile firms, while all other firms are classified as non‐income‐mobile…”

Section: Methodsmentioning

confidence: 99%

“…De Simone et al () argue income‐mobile firms have access to more long‐term and sustainable tax planning opportunities than other firms. They note that income‐mobile firms are able to do this because of the difficulty of taxing mobile capital, and that U.S. MNCs can locate valuable capital in low‐tax jurisdictions to avoid taxes with relatively low risk.…”

Section: Prior Literature and Hypotheses Developmentmentioning

confidence: 99%

How Quickly Do Firms Adjust to Optimal Levels of Tax Avoidance?

Kim

McGuire²,

Savoy

et al. 2019

Contemporary Accting Res

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The trade‐off literature asserts that managers weigh the direct benefits of tax avoidance against the associated nontax costs. This literature implies each firm has a unique optimal level of tax avoidance that balances these costs and benefits. Our study is the first to document how quickly the average firm moves toward its optimal level of tax avoidance. We find that the typical firm converges toward its optimum at a rate that ranges from approximately 69 to 84 percent over a three‐year period, depending upon model specifications. Consistent with asymmetric levels of frictions across the tax avoidance distribution, we find the speed of adjustment is greater for firms below their optimal level of tax avoidance than for firms above. We perform additional cross‐sectional analyses to provide insight into some of the frictions that prevent firms from adjusting completely to their optimal level of tax avoidance. We generally find growth firms exhibit slower adjustment speeds and provide limited evidence that both multinational firms and income‐mobile firms exhibit faster adjustment speeds.

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“… 6. Another recent study by De Simone, Mills, and Stomberg (2016) uses IRS audit data to consider a narrow definition of tax risk: negative IRS audit outcomes. Although potential cash outflows to tax authorities impact tax risk, for our research question, we prefer to use a broader measure of tax risk. …”

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confidence: 99%

Does Tax Risk Affect Investor Valuation of Tax Avoidance?

Drake

Lusch

Stekelberg

2017

Journal of Accounting, Auditing & Finance

156

157

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We examine how investors value tax avoidance (measured as the level of cash effective tax rates [ETRs]) and tax risk (measured as the volatility of cash ETRs), and how these constructs interact to influence firm value. Our results suggest that investors positively value tax avoidance but negatively value tax risk and, most importantly, that greater tax risk moderates the positive valuation of tax avoidance. In additional analyses, we find that contemporaneous measures of tax avoidance and tax risk provide insight into future tax cash flows and that our results hold using GAAP ETR-based measures of tax avoidance and tax risk. Finally, our results are robust to a battery of sensitivity checks including controlling for idiosyncratic and systematic risk, the cost of equity capital, and unrecognized tax benefits in the post-FIN 48 period, among others. Broadly, our findings provide new evidence on how taxes affect firm value and suggest that tax avoidance and tax risk should be considered jointly rather than in isolation.

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Using IRS Data to Identify Income Shifting to Foreign Affiliates

Cited by 8 publications

References 57 publications

How Reliably Do Empirical Tests Identify Tax Avoidance?

How Reliably Do Empirical Tests Identify Tax Avoidance?

How Quickly Do Firms Adjust to Optimal Levels of Tax Avoidance?

Does Tax Risk Affect Investor Valuation of Tax Avoidance?

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