Offshore Activities and Corporate Tax Avoidance

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.

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