Taxes and Haven Activities: Evidence from Linguistic Cues
The Accounting Review, Forthcoming
53 Pages Posted: 20 May 2019 Last revised: 7 Oct 2021
Date Written: September 3, 2021
Users of Exhibit 21 cannot tell whether a tax haven subsidiary is actively operating or a dormant shell company. In this paper, we develop a new set of parsimonious measures to highlight the distinct mechanisms and tax effects of offshore sales to, as opposed to purchases from, tax haven countries, offering insights on the effects of certain types of offshoring activities on firms’ tax burdens. Our main measure has about three times the effect of the mere existence of a haven subsidiary in explaining firms’ effective tax rates. We detail the processes to predict the offshore activities in tax haven countries for firms without an Exhibit 21 and firms reporting no subsidiary operations in a tax haven country. Relative to the mere mention of a tax haven subsidiary in Exhibit 21, our new measures provide a richer information set to capture different types of economic activities in tax haven countries.
Keywords: linguistics, tax haven, offshoring, economic substance, physical presence
JEL Classification: G30, H25, H26, M41
Suggested Citation: Suggested Citation