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The Economic Effects of Special Purpose Entities on Corporate Tax Avoidance

60 Pages Posted: 1 Feb 2015 Last revised: 19 Oct 2017

Paul Demere

University of Georgia - J.M. Tull School of Accounting; University of Illinois at Urbana-Champaign - Department of Accountancy

Michael P. Donohoe

University of Illinois at Urbana-Champaign - Department of Accountancy

Petro Lisowsky

University of Illinois at Urbana-Champaign - Department of Accountancy; Norwegian Center for Taxation

Date Written: November 18, 2017

Abstract

This study provides the first large-sample evidence on the economic tax effects of special purpose entities (SPEs). Unlike transactions that directly generate tax savings, these increasingly common components of corporate organizational structures facilitate tax savings by enabling sponsor-firms to conduct a greater level of tax-advantaged transactions and/or enhance the tax efficiency (i.e., relative tax savings) of such transactions. Using path analysis, we find that SPEs facilitate a greater level of specific transactions such that 1.8% of the cash tax savings from leverage, 3.3% from net operating loss carryforwards, 8.7% from research and development (R&D), 6.1% from intangibles, and all cash tax savings from tax havens occur within SPEs. We estimate that SPEs facilitate incremental cash tax savings of about $82.4 billion for our sample of 10,284 SPE users, or roughly 2% of total U.S. federal corporate tax collections during 1997-2011. Finally, moderation analysis reveals that SPEs enhance the total tax efficiency of transactions involving R&D and intangibles by 92.6% and 72.5%, 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 (November 18, 2017). 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

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

1206 South Sixth Street
Champaign, IL 61820
United States

Michael Donohoe (Contact Author)

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

1206 South Sixth Street
Champaign, IL 61820
United States

Petro Lisowsky

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

1206 South Sixth Street
Champaign, IL 61820
United States

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

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