'Just BEAT It' Do firms reclassify costs to avoid the base erosion and anti-abuse tax (BEAT) of the TCJA?

57 Pages Posted: 17 Feb 2021 Last revised: 20 Feb 2024

See all articles by Stacie Kelley Laplante

Stacie Kelley Laplante

University of Wisconsin - Madison

Christina Lewellen

North Carolina State University - Department of Accounting

Dan Lynch

University of Wisconsin - Madison - Department of Accounting and Information Systems

David M. P. Samuel

Singapore Management University - School of Accountancy

Date Written: October 1, 2023

Abstract

This study empirically examines whether firms reclassify related-party payments to avoid the base erosion and anti-abuse tax (BEAT) of the Tax Cuts and Jobs Act (TCJA). We leverage the BEAT filing threshold and use both a difference-in-differences design among U.S. firms and a triple-difference design utilizing the parent company’s location to provide evidence that firms reclassify related-party payments to avoid the BEAT. This effect is stronger in firms with greater pre-TCJA income shifting incentives. We estimate a $6 billion aggregate reduction in U.S. taxes for our sample firms in 2018. We also examine the consequences of reclassifying related-party payments and find some evidence of an increase in tax reserves and a reduction in internal information quality for firms that engage in cost reclassification to avoid the BEAT. These findings help explain observed BEAT collection shortfalls, contribute to the current policy debate about international tax reform, and document spillover effects of tax policy.

Keywords: tax reform, international tax, tax reserves, internal information quality, TCJA, BEAT

JEL Classification: H26, F23, G30, G14

Suggested Citation

Laplante, Stacie Kelley and Lewellen, Christina and Lynch, Dan and Samuel, David, 'Just BEAT It' Do firms reclassify costs to avoid the base erosion and anti-abuse tax (BEAT) of the TCJA? (October 1, 2023). WU International Taxation Research Paper Series No. 2021-03, Singapore Management University School of Accountancy Research Paper, Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3784739 or http://dx.doi.org/10.2139/ssrn.3784739

Stacie Kelley Laplante (Contact Author)

University of Wisconsin - Madison ( email )

975 University Avenue
Madison, WI 53706
United States
608-265-3494 (Phone)
608-265-3494 (Fax)

Christina Lewellen

North Carolina State University - Department of Accounting ( email )

Raleigh, NC 27695-8113
United States

Dan Lynch

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

David Samuel

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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