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

Abstract

We highlight an opportunity for improved measurement of a key data item in corporate tax research; a firm’s tax residence or “tax citizenship.” Some countries define tax residence based on a firm’s location of incorporation, some on a firm’s location of headquarters, and some consider both locations. Because no data source exists that provides information on firms’ tax residence, studies typically apply a uniform assignment of either the location of incorporation, headquarters, or center of business activity. We use a novel algorithm that embeds the residency laws of 150 countries to accurately assign tax residence. We reassign the tax residence of a considerable fraction of firms relative to standard proxies, and provide evidence that reassignment significantly affects inferences. For instance, for cross-border mergers and acquisitions with a US acquiror, 16% of the deal value involves an acquiror that is reassigned. Moreover, 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