Is Tax Aggressiveness Associated with Tax Litigation Risk? Evidence from D&O Insurance
68 Pages Posted: 2 Mar 2018 Last revised: 3 Jun 2020
Date Written: June 1, 2020
This study uses directors’ and officers’ (D&O) insurance data to examine the relation between tax aggressiveness and tax litigation risk. D&O insurance covers litigation costs for tax-related cases. Thus, D&O insurance premiums provide an independent and direct assessment of the risk in a firm’s tax aggressiveness strategies, which mitigates some of the challenges in studying tax risk. Based on pricing decisions, D&O insurers appear to view tax aggressiveness, as measured by industry- and size-adjusted cash effective tax rates (a measure where higher rates are associated with more tax aggressiveness), as increasing tax-related litigation risk. Regarding tax uncertainty, premiums increase (decrease) as unrecognized tax benefits (UTB-related settlements with tax authorities) increase. Finally, D&O insurers focus on firms with outbound tax haven activity when pricing tax aggressiveness. Overall, this suggests D&O insurers include aspects of both low taxes and tax uncertainty when pricing tax litigation risk.
Keywords: Tax Litigation, Tax Risk, Tax Aggressiveness, Tax Uncertainty, Directors’ and Officers’ Insurance
JEL Classification: D82, G30, H26, K22, K41, M41
Suggested Citation: Suggested Citation