Taxes and Haven Activities: Evidence from Linguistic Cues

66 Pages Posted: 20 May 2019

See all articles by Kelvin Law

Kelvin Law

Nanyang Technological University (NTU)

Lillian F. Mills

University of Texas at Austin - McCombs School of Business

Date Written: May 17, 2019

Abstract

Using recent advances in textual analysis proposed by Hoberg and Moon [2017, 2018], this paper refines the use of tax havens to identify tax-avoiding firms in two ways. First, we classify the use of tax havens into outbound payments and inbound receipts based on firms’ activities in tax havens. Second, within outbound payments to tax havens, we further classify the use of tax havens into those with and without economic substance based on firms’ mention of their physical presence in tax havens. We find that firms with outbound payments to tax havens without physical presence report lower effective tax rates and higher unrecognized tax benefits than firms without such payments. This translates into an estimated decrease of $1 million dollars in cash taxes paid per firm-year. Overall, linguistic cues in firms’ qualitative disclosures provide incremental information beyond the simple use of tax havens to reveal firms’ use of tax havens for tax-avoidance purposes.

Keywords: linguistics, tax haven, offshoring, economic substance, physical presence

JEL Classification: G30, H25, H26, M41

Suggested Citation

Law, Kelvin and Mills, Lillian F., Taxes and Haven Activities: Evidence from Linguistic Cues (May 17, 2019). Available at SSRN: https://ssrn.com/abstract=2768605 or http://dx.doi.org/10.2139/ssrn.2768605

Kelvin Law (Contact Author)

Nanyang Technological University (NTU) ( email )

Nanyang Business School
Singapore, 639798
Singapore

Lillian F. Mills

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

Austin, TX 78712
United States

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