Taxes and Haven Activities: Evidence from Linguistic Cues

The Accounting Review, Forthcoming

Nanyang Business School Research Paper No. 20-32

53 Pages Posted: 20 May 2019 Last revised: 7 Oct 2021

See all articles by Kelvin Law

Kelvin Law

Nanyang Business School, Nanyang Technological University

Lillian F. Mills

The University of Texas at Austin; University of Texas at Austin - McCombs School of Business

Date Written: September 3, 2021

Abstract

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

Law, Kelvin and Mills, Lillian F. and Mills, Lillian F., Taxes and Haven Activities: Evidence from Linguistic Cues (September 3, 2021). The Accounting Review, Forthcoming, Nanyang Business School Research Paper No. 20-32, Available at SSRN: https://ssrn.com/abstract=2768605 or http://dx.doi.org/10.2139/ssrn.2768605

Kelvin Law (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Lillian F. Mills

The University of Texas at Austin ( email )

McCombs School of Business
1 University Station B6400
Austin, TX 78712-0211

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

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