When Does Tax Avoidance Result in Tax Uncertainty?
Massachusetts Institute of Technology (MIT) - Sloan School of Management
Edward L. Maydew
University of North Carolina at Chapel Hill
Augut 10, 2016
We investigate the relation between tax avoidance and tax uncertainty, where tax uncertainty is the possibility of losing a claimed tax benefit upon challenge by a tax authority. On average, we find that tax avoiders, i.e., firms with relatively low cash tax rates, do bear significantly greater tax uncertainty than firms that have higher cash tax rates. However, we find that this relation is driven by firms with tax haven subsidiaries and high levels of R&D expense, proxies for intangible-related transfer pricing strategies. Thus, contrary to expectations, general tax avoidance (i.e., unrelated to tax havens) does not explain variation in tax uncertainty. The findings have implications for several puzzling results in the literature but also raise new questions.
Number of Pages in PDF File: 48
Keywords: tax avoidance, tax uncertainty
JEL Classification: M41, H25
Date posted: January 6, 2014 ; Last revised: August 27, 2016