The Economic Effects of Special Purpose Entities on Corporate Tax Avoidance

54 Pages Posted: 1 Feb 2015 Last revised: 4 Nov 2016

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 3, 2016

Abstract

This study provides the first large-sample empirical evidence on the economic tax effects of special purpose entities (SPEs). As separate legal entities, SPEs 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 then estimate that SPEs facilitate total cash tax savings of between $111-$223 billion for our sample of 10,284 SPE users, or roughly 2.5%-5.0% 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: off-balance sheet entities, special purpose entities, tax avoidance, effective tax rate, organizational structure

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 3, 2016). 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 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

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

Paper statistics

Downloads
470
Rank
48,767
Abstract Views
1,380