Tax Avoidance in Response to a Decline in the Funding Status of Defined Benefit Pension Plans

41 Pages Posted: 28 Mar 2015 Last revised: 17 Sep 2016

See all articles by Neeru Chaudhry

Neeru Chaudhry

affiliation not provided to SSRN

Hue Hwa Au Yong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Chris Veld

Monash University

Date Written: September 16, 2016

Abstract

We examine the effect of the funding status of defined benefit (DB) pension plans on company tax avoidance behavior. Our results reveal that firms engage more in tax avoidance when the pension deficit, defined as pension liabilities minus pension assets scaled by total assets, increases. We find that for an average pension deficit firm one standard deviation increase in pension deficit is associated with annual tax savings of $3.64 million. For 2014 we find that, on the aggregate level, for firms with underfunded DB pension plans a one standard deviation increase in pension deficit is associated with annual tax savings of more than 2.7 billion dollars. Our results hold after controlling for factors such as profitability, financial constraints, operating losses, and foreign income.

Keywords: Tax avoidance, tax planning, defined benefit pension plan, pension deficit, underfunded pension plan

JEL Classification: G32, H26, J32

Suggested Citation

Chaudhry, Neeru and Au Yong, Hue Hwa and Veld, Chris, Tax Avoidance in Response to a Decline in the Funding Status of Defined Benefit Pension Plans (September 16, 2016). Journal of International Financial Markets, Institutions and Money, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2585801 or http://dx.doi.org/10.2139/ssrn.2585801

Neeru Chaudhry (Contact Author)

affiliation not provided to SSRN

Hue Hwa Au Yong

Monash University - Department of Banking and Finance ( email )

PO Box 197
Caulfield East, Victoria 3145
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Chris Veld

Monash University ( email )

Building 11E
Clayton, Victoria 3800
Australia

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