Research | Kenan-Flagler

Tax-Induced Organizational Complexity and Executive Performance Measurement

We examine how tax-induced organizational complexity (“TIOC”), which we define as the organizational complexity that would not exist in a zero-tax world, is associated with executive performance measurement.

Investor Perceptions of the Book Minimum Tax

The Inflation Reduction Act establishes a new 15 percent corporate minimum tax on large U.S. corporations’ adjusted financial accounting income. While the minimum tax is estimated to raise $222 billion over 10 years, critics fear firms will manipulate their accounting earnings to reduce their tax liabilities, resulting in less revenue raised. Further, given the current political environment future legislatures could gut the tax, further eroding estimated tax revenues. Using an event study, we examine the extent to which investors believe this tax will reduce firm value. We examine stock market reactions around key legislative developments leading to the enactment of the book minimum tax.

The Effect of U.S. Country-by-Country Reporting on U.S. Multinationals’ Tax-Motivated Income Shifting and Real Activities

The Organization for Economic Co-operation and Development introduced country-by-country reporting (CbCR) for multinational enterprises (MNEs) to help tax authorities combat tax-motivated income shifting. This study uses confidential U.S. tax administrative data from 2011 to 2018 to examine the effect of U.S. CbCR adoption on the tax-motivated income shifting and real activities of U.S. MNEs. We first document that while U.S. CbCR provides the Internal Revenue Service with incremental information about the location of U.S. MNEs’ global activities relative to existing U.S. tax return disclosures, we observe substantial overlap between U.S. CbCR and existing disclosures. In contrast with prior CbCR studies in cross-country settings, we fail to find evidence of a change in U.S. MNEs’ tax-motivated income shifting or a reallocation of real activities based on tax incentives in response to U.S. CbCR using multiple empirical approaches. Overall, our study leverages U.S. tax administrative data to provide insights into the impact of the CbCR initiative on U.S. MNEs. Authors: Nessa, Michelle L., and Persson, Anh, and Song, Jane Z., and Towery, Erin, and Vernon, Mary

How Do Investors Value the Publication of Tax Information? Evidence From the European Public Country-By-Country Reporting

We examine the capital market reaction to the announcement of the European Union (EU) to introduce a public tax country-by-country reporting (CbCR) regime. By employing an event study methodology, we find a significant cumulative average abnormal return (CAAR) of -0.699%, which translates into a monetary value drop of approximately EUR 65 billion. We conclude that investors evaluate reputational risks arising from public scrutiny and competitive disadvantages to outweigh potential benefits of an extended information environment or more sustainable corporate tax strategies. In cross-sectional tests, we find that the average investor reaction is more pronounced for firms with low effective book tax rates, indicating that reputational concerns play a significant role in the marginal investor's investment behavior. Furthermore, our cross-sectional results indicate that the market reaction is stronger for firms operating in industries with high growth in market participants, providing an initial indication for the role of the competitive environment as an additional channel. Our inferences are of particular importance in light of the current ongoing debates on similar disclosure rules (particularly in the United States; cf. "Disclosure of Tax Havens and Offshoring Act") as well as for sustainability standard setters. Authors: Muller, Raphael Spengel, Christoph Weck, Stefan

Tax Planning Knowledge Diffusion via the Labor Market

This paper examines the extent to which the labor market facilitates the diffusion of tax planning knowledge across firms. Using a novel dataset of tax department employee movements between S&P 1500 firms, the researchers find that firms experience an increase in their tax planning after hiring a tax employee from a tax aggressive firm. This finding is robust to various research designs and specifications.

Neighborhood-Level Investment from the U.S. Opportunity Zone Program: Early Evidence

Kennedy, Patrick and Wheeler, Harrison | We use electronically-filed federal tax records from tax year 2019 to document the first available evidence on the short-run response of financial capital to the Opportunity Zone (OZ) program, a federal place-based policy that provides tax incentives for capital investments in more than 8,000 low-income neighborhoods across the United States.

Corporate Profit Shifting and the Role of Tax Havens: Evidence from German Country by Country Reporting Data

This paper is the first to use information from individual country-by-country (CbC) re-ports to assess the extent of profit shifting by multinational enterprises. Unlike other data often used to evaluate the extent of profit shifting and tax avoidance, CbC reports pro-vide a complete coverage of the global distribution of profits and indicators of economic activity for multinationals exceeding a certain revenue threshold. We show that 82% of the German multinationals subject to CbC reporting have tax haven subsidiaries and that these subsidiaries are notably more profitable than those in non-havens. However, only 9% of the global profits of German multinationals are reported in tax havens. Results from regression analysis suggest that approximately 40% of the profits reported in tax havens are a result of tax-induced profit shifting. The associated annual tax base loss for Germany amounts to EUR 5.4 billion. Adding estimates of profit shifting by multinationals not covered by the CbC data yields an overall estimate for profits shifted out of Germany to tax havens of EUR 19.1 billion per year, corresponding to 4.3% of the profits reported by these firms in Germany. This implies a tax revenue loss due to corporate profit shifting to tax havens of EUR 5.7 billion per year. Authors: Fuest, Clemens and Hugger, Felix and Neumeier, Florian

Shareholder Wealth Effects of Border Adjustment Taxation

Following two decades of discussion, the border adjustment tax briefly emerged as part of proposed U.S. corporate tax reform in early 2017.

Is Tax Planning Best Done In Private

We utilize extensive Internal Revenue Service data to investigate the tax behavior of comparable privately-held and publicly-held corporations. Our findings paint a nuanced picture of private versus public firm tax planning.

Do investors care about tax disclosure?

We assess the investor reaction to a potential introduction of public country-by-country reporting (CbCR) into the European Capital Requirements Directive IV. Estimating cumulative abnormal returns with the help of a multivariate regression model, we find weak significant evidence around our event date (February 20th, 2013) that investors perceive the introduction of CbCR as beneficial. In additional tests, we assess investor perceptions relative to different control groups (domestic institutions and non-EU institutions) and in the cross-section (splitting across size, systemically relevant, pre-event level of GAAP ETR and pre-event level of geographic disclosure). The only significant outcome is a negative reaction for large international EU institutions. Authors: Flagmeier, Vanessa and Gawehn, Vanessa

Tax Reform Made Me Do It!

This paper examines corporations’ actions, and statements about actions, following the tax law change known as the Tax Cuts and Jobs Act (TCJA). Specifically, we examine four different outcomes — bonuses (or other actions that benefit workers), announcements of new investments, share repurchases, and dividend announcements.

Strategic Subsidiary Disclosure

We use data multinational firms provide to the Internal Revenue Service regarding their foreign subsidiary locations to explore whether some firms fail to publicly disclose subsidiaries in some countries, even when the subsidiaries are significant and should be disclosed per Security and Exchange Commission rules.

U.S. Firms on Foreign (Tax) Holidays

We undertake the first large-sample examination of foreign tax holiday participation among U.S. corporations. Tax holidays are temporary reductions of tax granted by governments, usually in conjunction with new business investment.

The Taxman Cometh: Does Tax Uncertainty Affect Corporate Cash Holdings?

We examine whether firms hold more cash in the face of tax uncertainty.

Is the Market Grossed out by Gross-Ups? An Investigation of Firms that Pay Their CEOs’ Taxes

This study provides evidence on whether investors value tax gross-up provisions for executives, and how the elimination of these provisions changes executive compensation.