The Economic Effects of Special Purpose Entities on Corporate Tax Avoidance

70 Pages Posted: 1 Feb 2015 Last revised: 21 Oct 2018

See all articles by Paul Demere

Paul Demere

University of Georgia - J.M. Tull School of Accounting

Michael P. Donohoe

University of Illinois at Urbana-Champaign - Department of Accountancy

Petro Lisowsky

Boston University Questrom School of Business; Norwegian Center for Taxation

Date Written: October 17, 2018

Abstract

This study provides the first large-sample evidence on the economic tax effects of special purpose entities (SPEs). These increasingly common organizational structures facilitate corporate tax savings by enabling sponsor-firms to increase tax-advantaged activities and/or enhance their tax efficiency (i.e., relative tax savings of a given activity). Using path analysis, we find that SPEs facilitate greater tax avoidance, such that an economically large amount of cash tax savings from research and development (R&D), depreciable assets, net operating loss carryforwards, intangible assets, foreign operations, and tax havens occur within SPEs. We estimate that SPEs facilitate over $330 billion of incremental cash tax savings, or roughly 6% of total U.S. federal corporate income tax collections during 1997-2016. Interaction analyses reveal that SPEs enhance the tax efficiency of R&D and intangibles by 87.5% and 61.5%, respectively. Overall, these findings provide economic insight into complex organizational structures facilitating corporate tax avoidance.

Keywords: organizational structure, special purpose entity, tax avoidance

JEL Classification: H25, L22, M40

Suggested Citation

Demere, Paul and Donohoe, Michael P. and Lisowsky, Petro, The Economic Effects of Special Purpose Entities on Corporate Tax Avoidance (October 17, 2018). Available at SSRN: https://ssrn.com/abstract=2557752 or http://dx.doi.org/10.2139/ssrn.2557752

Paul Demere

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

Michael P. Donohoe (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Petro Lisowsky

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Ste. 518H
Boston, MA 02215
United States
6173532661 (Phone)

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

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