Distilling the Reserve for Uncertain Tax Positions: The Revealing Case of Black Liquor
36 Pages Posted: 11 Feb 2011 Last revised: 28 Sep 2013
Date Written: February 10, 2011
We examine the extent to which tax accruals, specifically the reserve for uncertain tax benefits, influence common empirical measures of income tax avoidance. We analyze the financial statement disclosures for 19 paper companies that received a total of $6.4 billion in direct government subsidies structured as refundable excise taxes during 2009. Each of these companies included the refunds in financial income in 2009, but fourteen of these firms excluded all or part of the refunds from taxable income. Despite the unprecedented nature of the exclusion, we find significant variation in the tax accruals meant to represent uncertain tax positions. Our evidence suggests the subjectivity of management’s decision to establish a reserve for uncertain tax positions can result in biased measures of tax avoidance constructed from financial reports.
Keywords: Effective tax rate, uncertain tax positions, tax avoidance
JEL Classification: M41, H25
Suggested Citation: Suggested Citation