Posted: 7 Dec 2007 Last revised: 12 Feb 2008
This study finds a strong relationship at the firm level between differences in the rates of return reported for the financial and tax consolidated groups on one hand and differences in tax return and financial statement capital structure measures on the other. In particular, after controlling for size, profitability, global character (domestic or multinational), industry, and the lack of eliminating entries for intercompany transactions, the authors find that the more the rate of return for the financial group exceeds the rate of return for the tax group, the more the tax measures of leverage, debt, interest, and assets exceed financial measures for the same items. Their results, they note, are consistent with several explanations, including the use of special purpose entities, hybrid financing arrangements, state tax reporting, deconsolidating from worldwide to U.S. reporting, transfer pricing, and the foreign tax credit limitation. The results are also consistent with the premise that taxpayers may be taking advantage of differences in the financial and tax consolidation rules to overreport income performance and underreport risk to shareholders relative to what they report to the IRS.
This report is based in part on confidential tax return data obtained from the IRS Statistics of Income Division. The data are protected by nondisclosure requirements under the Internal Revenue Code, and all statistics are presented in an aggregated form.
JEL Classification: M41, M43, H25, G32
Suggested Citation: Suggested Citation
Lisowsky, Petro and Trautman, William B., Book-Tax Consolidation, Rates of Return, and Capital Structure. Tax Notes, Vol. 117, No. 11, December 10, 2007. Available at SSRN: https://ssrn.com/abstract=1066402