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The Financial Reporting Effects of Tax Deductible Goodwill Impairments

58 Pages Posted: 1 Nov 2016 Last revised: 16 Sep 2017

Sarah Blechinger

University of Connecticut

Miles A. Romney

Florida State University; Michigan State University

Steven Utke

University of Connecticut - Department of Accounting

Date Written: September 15, 2017

Abstract

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

Blechinger, Sarah and Romney, Miles A. and Utke, Steven, The Financial Reporting Effects of Tax Deductible Goodwill Impairments (September 15, 2017). Available at SSRN: https://ssrn.com/abstract=2862196 or http://dx.doi.org/10.2139/ssrn.2862196

Sarah Blechinger

University of Connecticut ( email )

Storrs, CT 06269-1063
United States

Miles A. Romney

Florida State University ( email )

Tallahasse, FL 32306
United States

Michigan State University ( email )

Agriculture Hall
East Lansing, MI 48824-1122
United States

Steven Utke (Contact Author)

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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