Tax Planning Gone Awry: Do Tax-Motivated Firms Experience Worse Tax Outcomes from Losses Compared to Other Firms?

Abstract

We study the tax outcomes associated with losses in publicly traded U.S. multinational firms. We find that tax planning using tax haven operations, which is commonly associated with relatively favorable tax outcomes for profitable firms, is associated with poor tax outcomes from losses compared to multinational firms that do not tax plan with tax haven operations. Specifically, we find that firms with tax haven operations receive significantly lower tax loss benefits in terms of both tax loss carrybacks and tax loss carryforwards. We demonstrate the striking asymmetry of the tax U.S. system, in which U.S. multinational firms are often unable to fully realize tax benefits for their losses despite provisions for tax loss carrybacks and carryforwards, and show that tax planning exacerbates this asymmetry. In addition, we note that our findings highlight a potential cost of tax avoidance: lower tax benefits from losses. We also contribute to the tax avoidance literature by providing a research design framework for studying tax outcomes during loss years.

Keywords: loss firms, tax avoidance, tax loss carrybacks

JEL Classification: M41, H20, H26