Is Tax Planning Associated with Tax Risk? Evidence from D&O Insurance
64 Pages Posted: 2 Mar 2018 Last revised: 31 Jul 2019
Date Written: July 2019
This study uses directors’ and officers’ (D&O) insurance data to examine the relation between tax planning and tax 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 planning strategies, which mitigates some of the challenges in studying the relation between tax planning and 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 planning. Overall, this suggests D&O insurers include aspects of both tax aggressiveness and tax uncertainty when pricing tax risk.
Keywords: Tax Litigation, Tax Risk, Tax Avoidance, Tax Uncertainty, Directors’ and Officers’ Insurance
JEL Classification: D82, G30, H26, K22, K41, M41
Suggested Citation: Suggested Citation