The Financial Reporting Effects of Tax Deductible Goodwill Impairments
58 Pages Posted: 1 Nov 2016 Last revised: 16 Sep 2017
Date Written: September 15, 2017
We investigate how special tax deductions for goodwill impairments influence financial reporting decisions. Unlike most countries, Luxembourg allows tax deductions for goodwill impairments without the need to dispose of any assets. We predict and find that large multinational firms with subsidiaries in Luxembourg are more likely to write down goodwill, and write down larger amounts of goodwill on average, than large multinational firms without subsidiaries in Luxembourg. However, we find that conditional on recording a goodwill impairment, the existence of a Luxembourg subsidiary does not affect the amount of each goodwill write-down. We find that the relation between Luxembourg subsidiaries and impairments is focused in firms that otherwise have stronger financial reporting incentives to avoid impairments. These findings are consistent with tax deductibility of goodwill impairments reducing the costs of impairments. We contribute to the literature on the interaction between book and tax reporting, the determinants of goodwill impairments, and the effects of book-tax conformity. This study is one of the few that look at the mechanisms through which firms avoid tax, in particular, examining a previously unexplored aspect of tax haven usage.
Keywords: Tax Havens, Goodwill, Impairments, Write-Offs, Book-Tax Conformity, Tax Planning, Tax Avoidance
JEL Classification: F23, H20, M41
Suggested Citation: Suggested Citation