Improving the Measurement of Tax Residence: Implications for Research on Corporate Taxation

Abstract

We propose an improved measurement of a key data item in corporate tax research, a firm’s tax residence. Prior research uses one of three proxies, which are in conflict with tax laws around the world. We use a novel algorithm that embeds the residency laws of 150 countries over 20 years to accurately assign tax residence and reassign a considerable fraction of firms relative to standard proxies. We provide evidence from two applications that reassignment significantly affects inferences. For instance, 20.7% of cross-border mergers and acquisitions involve an acquiror or target that is reassigned. Reassigned firms are systematically different from other firms along several dimensions, including effective tax rates.

Keywords: Corporate taxation, tax residence, tax law, mergers and acquisitions, tax havens

JEL Classification: H25, C81, H73, G34, K34, K33