Tax Avoidance through Advance Tax Rulings - Evidence from the LuxLeaks Firms

Abstract

Our empirical study tests the effect of advance tax rulings on the tax avoidance of multinational firms. In 2014, the International Consortium of Investigative Journalists published confidential documents that identify hundreds of firms worldwide that had benefited from advance tax rulings in the tax haven Luxembourg. We apply a difference-in-differences approach and find that after engaging in an advance tax ruling, firms have lower effective tax rates compared to non-ruling firms. The results are robust even if we mitigate a potential self-selection bias via propensity score matching. Consequently, this study gives evidence for tax avoidance through a newly made public, legally-assured tax shelter.

Keywords: Advance Tax Ruling, Tax Sheltering, Tax Avoidance, Effective Tax Rate

JEL Classification: H26, F23, M41