48 Pages Posted: 6 Jan 2014 Last revised: 27 Aug 2016
Date Written: 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.
Keywords: tax avoidance, tax uncertainty
JEL Classification: M41, H25
Suggested Citation: Suggested Citation
Dyreng, Scott and Hanlon, Michelle and Maydew, Edward L., When Does Tax Avoidance Result in Tax Uncertainty? (Augut 10, 2016). Available at SSRN: https://ssrn.com/abstract=2374945 or http://dx.doi.org/10.2139/ssrn.2374945