When Does Tax Avoidance Result in Tax Uncertainty?

48 Pages Posted: 6 Jan 2014 Last revised: 27 Aug 2016

Scott Dyreng

Duke University

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Edward L. Maydew

University of North Carolina at Chapel Hill

Date Written: Augut 10, 2016

Abstract

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

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

Scott Dyreng

Duke University ( email )

Box 90120, Fuqua School of Business
Durham, NC 27708-0120
United States

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-668
Cambridge, MA 02142
United States
617-253-9849 (Phone)

Edward L. Maydew (Contact Author)

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

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