Offshore Activities and Corporate Tax Avoidance

51 Pages Posted: 30 Nov 2021 Last revised: 22 Feb 2022

See all articles by Zhihong Chen

Zhihong Chen

Hong Kong University of Science and Technology

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Qingyuan Li

Wuhan University - School of Economics and Management

Yongbo Li

Wuhan University

Date Written: February 21, 2022

Abstract

We investigate the association between tax avoidance and offshore activities using a new text-based measure for offshore activities based on Hoberg and Moon (2017, 2019). Our evidence shows that although providing cross-border tax avoidance opportunities, offshore activities reduce the marginal benefits of tax avoidance by introducing incremental foreign-market risk exposure. We find that the intensity of offshore sales of outputs is positively associated with the cash effective tax rate. The effect is more pronounced when the offshore sales rely on overseas production rather than domestic production, when the offshore sales are located in countries with higher economic uncertainty, when the firm has a lower ability to pass on shocks, and when the firm has less flexibility in adjusting tax strategies. In addition, offshore activities exacerbate the positive relation between tax avoidance and tax uncertainty.

Keywords: Offshore activities, tax avoidance, uncertainty, flexibility, passing on shocks, tax uncertainty, multinational firms

JEL Classification: F30, G30, G32, G38, H26, K34, M10, M20, M40, M41, M48, M49

Suggested Citation

Chen, Zhihong and Hope, Ole-Kristian and Li, Qingyuan and Li, Yongbo, Offshore Activities and Corporate Tax Avoidance (February 21, 2022). Available at SSRN: https://ssrn.com/abstract=3974213 or http://dx.doi.org/10.2139/ssrn.3974213

Zhihong Chen

Hong Kong University of Science and Technology ( email )

Clear Water Bay
Kowloon
Hong Kong
Hong Kong
(852)-2358-7574 (Phone)
(852)-2358-1693 (Fax)

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Qingyuan Li

Wuhan University - School of Economics and Management ( email )

Wu Han, Hu-Bai 430072
China

Yongbo Li

Wuhan University ( email )

Wuhan
China

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