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Tax Uncertainty and Marginal Tax Avoidance
David A. Guenther, Ryan J. Wilson and Kaishu Wu
Lundquist College of Business
University of Oregon
Eugene, OR 97403 USA
September 2016
Abstract: We investigate whether higher levels of tax avoidance by U.S. corporations are, at the
margin, more uncertain than lower levels of tax avoidance. Using a research design from the
finance literature, we estimate a system of equations to demonstrate that on average each
additional dollar of potential tax results in 62.4 cents of cash taxes paid and 37.6 cents of tax
avoided. Of the tax avoided, 2.3 cents represent additions to the reserve for uncertain tax
benefits (UTB reserve), or 6.1% of the total tax avoided. We then partition sample firms into
groups that prior research suggests engage in increased tax avoidance – firms facing financial
constraint, firms with operations in tax havens, and multinational firms – and examine the
amount of tax avoidance that results in additions to the UTB reserve. Results suggest that, on
average, increased tax avoidance is not necessarily associated with increased additions to UTB
reserves, and therefore may not be uncertain.
JEL classification: H26; M41; M48
Key Words: tax avoidance, uncertainty, FIN48, UTB reserve
Corresponding Author:
Professor David A. Guenther
Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403-1208
Phone: (541) 346-5384
Fax: (541) 346-3341
email: [email protected]
We thank Alex Edwards, Kevin Law, Steve Matsunaga, Ken Njoroge, Terry Shevlin, John Wertz, Brian
Williams, and workshop participants at the UBCOW conference for helpful comments on an earlier
version.
1
Tax Uncertainty and Marginal Tax Avoidance
1. Introduction
We investigate whether higher levels of tax avoidance by U.S. corporations are, at the
margin, more uncertain than lower levels of tax avoidance, where "more uncertain" means an
increase in the likelihood that the tax avoidance will be reflected in the firm's reserve for
uncertain tax benefits (UTB reserve) under Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN48) (FASB 2006).1 If uncertainty about a firm's tax positions is
increasing in the amount of tax avoidance, then at the margin if a firm increases the level of tax
avoidance, the additional tax avoided should be more uncertain and more likely be reflected in
the UTB reserve. We utilize the same definition of "uncertainty" as that used by Dyreng, Hanlon
and Maydew (2016), namely: "The tax authorities may challenge the firm's tax avoidance and
ultimately prevail, resulting in the loss of the tax savings that initially came with the tax
avoidance. We refer to potential for grey area tax avoidance to ultimately fail as tax uncertainty"
(p 1).
To investigate whether increased tax avoidance is more uncertain, we adopt a research
design from the finance literature (Chang, Dasgupta, Wong and Yao 2014) that uses a system of
equations to determine how firms use an additional dollar of operating cash flow.2 Using this
approach, we first compute for each firm a "potential tax" equal to 35% of pretax income, plus
state tax expense. We then construct a mathematical identity such that the potential tax must
result in either (1) cash taxes paid (net of settlements with tax authorities) or (2) tax avoided.
1 FIN 48 is now codified as ASC 740-10. 2 This method has been used in the accounting literature by Guenther, Njoroge and Williams (2015) to investigate
what firms do with additional cash flows generated from tax avoidance. To the best of our knowledge, ours is the
first paper to use the method to decompose tax avoidance.
2
Finally, we separate the tax avoided into "uncertain" and "conventional"3 tax avoidance using the
information on additions to the UTB reserve for the year to identify uncertain tax avoidance, an
approach first used by Dyreng et al. (2016). We then estimate a system of equations to
determine how much of each marginal dollar of potential tax, on average, is represented by cash
taxes paid, uncertain tax avoidance, or conventional tax avoidance. We find that each additional
dollar of potential tax is associated on average with 62.4 cents of cash taxes paid (net of
settlements), 2.3 cents of uncertain tax avoidance, and 35.2 cents of conventional tax avoidance.4
The 2.3 cents of uncertain tax avoidance represents 6.1% of total tax avoidance:
2.3/(2.3+35.2) = 6.1%.
To identify marginal tax avoidance we rely on three settings that suggest firms are
engaging in increased levels of tax avoidance: (1) firms with high levels of financial constraint;
(2) firms with operations in tax haven countries, and (3) multinational firms.5 Edwards, Schwab
and Shevlin (2016) find evidence that financially constrained firms have lower cash effective tax
rates, and Law and Mills (2015) report that financially constrained firms have higher UTB
reserves.6 We find that, for firms facing high (low) financial constraint, each additional dollar of
potential tax is associated on average with 60.1 (71.7) cents of cash taxes paid (net of
3 We use the term "conventional" to refer to tax avoidance that is not "uncertain" in that it does not reflect increases
in firms' UTB reserves. We do not suggest that conventional tax avoidance is not also subject to some future risk of
repayment. 4 2.3, 35.2, and 62.4 do not add exactly to 100 due to rounding. 5 We use the term marginal tax avoidance to refer to settings where we expect a set of firms (i.e. financially
constrained, tax haven, or multinational) to be engaged in additional tax avoidance in comparison to firms that do
not exhibit those characteristics. 6 Another recent study (Dyreng and Markle 2016) actually finds that constrained firms shift less of their earnings out
of the U.S., a result that suggests constrained firms in fact pay more tax. Dyreng and Markle argue that the findings
in Edwards et al. (2016) and Law and Mills (2015) reflect temporary tax avoidance rather than the more permanent
avoidance that results from income shifting.
3
settlements), 2.4 (1.6) cents of uncertain tax avoidance, representing 6.0% (5.7%) of total tax
avoidance, and 37.6 (26.7) cents of conventional tax avoidance.7
Dyreng and Lindsey (2009) find that U.S. firms that disclosed material operations in at
least one tax haven country have a worldwide tax burden on worldwide income that is
approximately 1.5 percentage points lower than firms without operations in at least one tax
haven country. We find that, for firms with (without) operations in tax haven countries, each
additional dollar of potential tax is associated on average with 63.4 (69.3) cents of cash taxes
paid (net of settlements), 2.4 (2.4) cents of uncertain tax avoidance, representing 6.6% (7.8%) of
total tax avoidance, and 34.2 (28.3) cents of conventional tax avoidance.
Because many tax planning opportunities relate to the ability to shift income to low tax
jurisdictions, we also do a comparison of domestic and multinational firms. We find that, for
firms with (without) multinational operations, each additional dollar of potential tax is associated
on average with 60.0 (66.4) cents of cash taxes paid (net of settlements), 2.8 (1.6) cents of
uncertain tax avoidance, representing 7.0% (4.8%) of total tax avoidance, and 37.2 (32.0) cents
of conventional tax avoidance.
Finally, we separate our sample firms into those with operations in tax havens that also
have high R&D expense, and those without operations in tax havens that have low R&D
expense. Existing research indicates that intangible intensive firms are better able to shift
income across jurisdictions (Grubert and Slemrod 1998). We expect intangible intensive firms
also operating in a tax haven to be particularly well suited to engage in greater amounts of tax
avoidance. For the group with tax haven operations and high R&D expense, each additional
dollar of potential tax is associated on average with 56.3 cents of cash taxes paid (net of
7 The finding that constrained firms pay less cash taxes is consistent with Edwards et al. (2016) and the finding that
additions to UTB reserves are higher is consistent with Law and Mills (2015).
4
settlements), 2.6 cents of uncertain tax avoidance, representing 6.0% of total tax avoidance, and
41.0 cents of conventional tax avoidance. For the group without tax haven operations and low
R&D expense, each additional dollar of potential tax is associated on average with 68.8 cents of
cash taxes paid (net of settlements), 2.1 cents of uncertain tax avoidance, representing 6.8% of
total tax avoidance, and 29.0 cents of conventional tax avoidance.
Overall we interpret our results as providing evidence that marginal tax avoidance is not
necessarily associated with more uncertain tax avoidance, as reflected in additions to the UTB
reserve. For example, firms facing a high level of financial constraint have about the same level
of uncertain tax avoidance as the overall sample (2.4 cents or 6.0% vs. 2.3 cents or 6.1%).
Although the financially constrained firms pay less of each additional dollar of potential tax as
cash taxes paid (60.1 cents vs. 62.4 cents), the tax avoided is mainly conventional (37.6 cents vs.
35.2 cents) and does not result in an increase in the UTB reserve. Similarly, firms with
operations in tax havens pay less of each additional dollar of potential tax as cash taxes paid
relative to firms without operations in tax havens (63.4 cents vs. 69.3 cents), but the tax avoided
is mainly conventional (34.2 cents vs. 28.3 cents) and does not result in an increase in the UTB
reserve.
The group of firms that has the lowest percentage of potential tax paid in cash is the
group with tax haven operations and a high R&D expense. This group pays on average 56.3
cents for each additional dollar of potential tax, but only 2.6 cents of each additional dollar of
potential tax represents an addition to the UTB reserve, or 6.0% of the total tax avoided.
Compare this with the entire sample, which pays on average 62.4 cents for each additional dollar
of potential tax, and for which 2.3 cents of each additional dollar of potential tax results in an
addition to the UTB reserve, or 6.1% of the total tax avoided.
5
One interpretation of prior work documenting differences in cash effective tax rates
across different groups of firms is that the groups with lower cash effective tax rates are willing
to accept more tax uncertainty and that allows them to achieve lower tax rates. Our results
indicate that observed differences in cash effective tax rates across different groups of firms are
not necessarily a reflection of differences in the amount of tax uncertainty firms will accept. In
other words, the firms with lower cash effective tax rates are not necessarily more tax aggressive.
Our results raise an interesting question: why isn't more of the additional tax avoidance
uncertain? Put another way, why don't firms take advantage of all of their conventional tax
avoidance opportunities first, before engaging in uncertain tax avoidance? For example, it seems
reasonable that financially constrained firms would accept more tax uncertainty to obtain capital
necessary to continue operating. However, if there is no difference in the amount of uncertain
tax avoidance between more constrained and less constrained firms, then it is not clear why the
less constrained firms would not also avail themselves of the same tax planning opportunities.
We suggest several possible explanations, all of which could potentially be occurring
simultaneously. First, it may be the case that marginal tax avoidance requires managerial effort,
and managers may not have sufficient incentives to pursue additional tax avoidance, especially if
it results in temporary tax reductions that do not reduce the firm's financial accounting income
tax expense. This result is consistent with the findings of McGuire, Wang and Wilson (2014)
who find that dual class stock entrenches managers and allows them to perform at a suboptimal
level with respect to tax avoidance. McGuire et al. state: "results indicate higher insider voting
rights are associated with lower levels of tax avoidance, suggesting that higher levels of control,
and thus entrenchment, allow managers to perform at a suboptimal level" (p 1489).
6
A second reason firms may not engage in more conventional tax avoidance is that the up-
front costs may be increasing in the level of avoidance, thus reducing the potential benefit of the
marginal tax savings. Managers may be reluctant to incur these additional costs unless forced to
do so, for example, by financial constraints. A third reason firms might not engage in more
conventional tax avoidance is that external stakeholders could exert pressure on managers to
limit tax avoidance, either because of potential agency costs (Desai and Dharmapala 2006) or
due to the negative reputational effects the firm may face (Dyreng, Hoopes and Wilde 2016).
Finally, marginal tax avoidance may, in fact, be much more uncertain than just those
amounts reflected as increases to UTB reserves, but managers could be reluctant to record a UTB
reserve increase because doing so reduces the potential financial reporting benefit of the tax
savings. Linck, Netter and Shu (2013) find that "the use of discretionary accruals can help
constrained firms with valuable projects ease those constraints and increase firm value" (p 2117),
thus suggesting that reported accounting earnings may be more valuable to constrained firms.
Consistent with this argument, Cazier, Rego, Tian and Wilson (2015) find that firms continue to
use the tax accrual reserve to manage earnings even after the introduction of FIN48.
Our study makes two important contributions to accounting research, one methodological
and one theoretical. The methodological contribution is to demonstrate a technique for inferring
how much of marginal tax avoidance is related to uncertain positions that are reflected in the
UTB reserve. The technique gives researchers a tool providing insight into how cross-sectional
differences in tax avoidance are achieved. Many recent studies document differences in firms'
levels of tax avoidance as a function of firm characteristics, but most of these studies provide
little insight into whether these differences are achieved because a particular type of firms is
more aggressively avoiding taxes. These studies suggest that the firms engaging in more tax
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avoidance are more aggressive tax planners. Our approach provides a way for researchers to
measure the degree of uncertainty associated with additional tax avoidance and to validate these
assumptions.
Our theoretical contribution is to demonstrate that, at least for our sample and time
period, the majority of the additional tax avoidance by firms is not uncertain. This suggests that
either marginal tax avoidance may not be all that uncertain, or that managers may be reluctant to
make additions to the UTB reserve for marginal tax avoidance, or both. Our results should also
be of interest to investors in that they suggest differences in observed levels of marginal tax
avoidance across firms may not be a function of differences in the appetite of firms for tax
uncertainty. Rather, variation in marginal tax avoidance across firms could be a function of
differences in the incentives of managers to exert the effort to pursue legal tax strategies.
Equally, differences in marginal tax avoidance could be a function of variation in the nontax
costs of tax avoidance for firms with different characteristics.
Our findings also have important implications for both tax policy and tax enforcement.
Results indicate that firms engaged in more marginal tax avoidance are not doing so by relying
on a high percentage of uncertain tax avoidance. This result suggest differences in marginal tax
avoidance across firms are more likely a function of differences in managers’ incentives to
pursue tax avoidance or firm characteristics that facilitate tax avoidance rather than differences
in the willingness to pursue uncertain or aggressive tax strategies. If the objective of tax
policymakers is to limit increasing levels of tax avoidance, these results suggest that increasing
tax enforcement or cracking down on a limited number of aggressive tax shelter strategies may
not result in a substantial reduction in tax avoidance or equalize tax burdens across firms.
8
2. Prior Literature
Prior research provides mixed evidence on whether tax avoidance is associated with
greater tax planning uncertainty. Hasan, Hoi, Wu, and Zhang (2014) find low cash effective tax
rates are associated with more stringent loan terms and higher bond spreads. They conclude that
banks view tax avoidance as engendering significant risk. Also consistent with tax avoidance
being associated with greater risk, Rego and Wilson (2012) find that managers with greater high
powered equity incentives engage in more tax avoidance. Despite the evidence that low cash
effective tax rates are associated with greater risk, it is not clear whether that risk is associated
with greater uncertainty related to the sustainability of firms’ tax positions.8
In fact, some research indicates low cash effective tax rates are not associated with
greater uncertainty at all. Specifically, Dyreng, Hanlon, and Maydew (2008) find that low annual
cash effective tax rates are actually more persistent than high annual cash effective tax rates. The
ability of firms to sustain low rates suggests they may not be indicative of greater risk. Further,
Guenther, Matsunaga, and Williams (2016) find no evidence that low cash effective tax rates are
associated with either greater future tax rate volatility or overall firm risk.
In a recent study, Dyreng, et al. (2016) directly examine the relation between tax
avoidance and tax uncertainty. They find firms with low cash effective tax rates do exhibit
significantly higher increases in UTBs. They find this positive association is driven by firms with
tax haven subsidiaries and high levels of R&D. Our study examines a related, but distinct
research question. Specifically, we focus on examining whether firms that prior research has
found are engaged in greater amounts of tax avoidance also exhibit greater amounts of tax
8 It is possible low cash effective tax rates are associated with greater risk of reputational costs, political costs, or
agency costs, and that the results in these studies, in-part, reflect that fact. These risks would not necessarily be
associated with higher UTBs that are a function of the risk the position will be sustained under audit by the tax
authority.
9
uncertainty. While firms with low cash effective tax rates may, on average, engage in more
uncertain tax avoidance, they may also engage in more conventional tax avoidance. In other
words, the percentage of taxes saved for low cash effective tax rate firms may not be more
uncertain. Our research design allows us to examine the extent to which this is the case.
3. Research Design
We follow the approach used by Chang et al. (2014) to estimate the uses of internally
generated cash flows.9 The starting point in Chang et al. is the cash flow identity from the cash
flow statement. While the regression approach in Chang et al. was designed specifically with the
cash flow identity in mind, it can be applied to any equation that is also an identity. For our
purposes, we construct an identity explaining a firm's tax expense as follows:
𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙𝑇𝑎𝑥𝑡 + 𝑆𝑒𝑡𝑡𝑙𝑒𝑚𝑒𝑛𝑡𝑠𝑡 ≡ 𝑇𝑎𝑥𝐴𝑣𝑜𝑖𝑑𝑒𝑑𝑡 + 𝐶𝑎𝑠ℎ𝑇𝑎𝑥𝑃𝑎𝑖𝑑𝑡, (1)
where (Compustat data items shown in parentheses):
PotentialTax = 0.35 × pretax income (PI) + current state income tax expense (TXS);
Settlements = settlements with tax authorities (TXTUBSETTLE);
CashTaxPaid = cash taxes paid (TXPD); and
TaxAvoided = PotentialTax – (CashTaxPaid – Settlements).
We further separate TaxAvoided into two components:
Uncertain = increase in current tax positions in the FIN48 reserve (TXTUBPOSINC);
and
Conventional = TaxAvoided – Uncertain.
The identity that forms the basis for our empirical tests is therefore:
9 The Chang et al. (2014) approach is explained in detail in Appendix B.
10
𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙𝑇𝑎𝑥𝑡 ≡ 𝐶𝑜𝑛𝑣𝑒𝑛𝑡𝑖𝑜𝑛𝑎𝑙𝑡 + 𝑈𝑛𝑐𝑒𝑟𝑡𝑎𝑖𝑛𝑡−𝑆𝑒𝑡𝑡𝑙𝑒𝑚𝑒𝑛𝑡𝑠𝑡 + 𝐶𝑎𝑠ℎ𝑇𝑎𝑥𝑃𝑎𝑖𝑑𝑡. (2)
We regress the different items on the right side of (2) (Conventional, Uncertain, etc.) on
PotentialTax to estimate a system of four regression equations as follows:
𝐶𝑜𝑛𝑣𝑒𝑛𝑡𝑖𝑜𝑛𝑎𝑙𝑖𝑡 = 𝛽𝐶𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙𝑇𝑎𝑥𝑖𝑡 + 𝜀𝑖𝑡𝐶 , (3)
𝑈𝑛𝑐𝑒𝑟𝑡𝑎𝑖𝑛𝑖𝑡 = 𝛽𝑈𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙𝑇𝑎𝑥𝑖𝑡 + 𝜀𝑖𝑡𝑈, (4)
𝑆𝑒𝑡𝑡𝑙𝑒𝑚𝑒𝑛𝑡𝑠𝑖𝑡 = 𝛽𝑆𝑒𝑡𝑡𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙𝑇𝑎𝑥𝑖𝑡 + 𝜀𝑖𝑡𝑆𝑒𝑡𝑡, (5)
𝐶𝑎𝑠ℎ𝑇𝑎𝑥𝑃𝑎𝑖𝑑𝑖𝑡 = 𝛽𝐶𝑇𝑃𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙𝑇𝑎𝑥𝑖𝑡 + 𝜀𝑖𝑡𝐶𝑇𝑃, (6)
All variables in the regressions are scaled by beginning of the year total assets, and all
regressions include industry and year fixed effects.10
The coefficient on PotentialTax represents how an increase of one dollar in a firm's
potential tax for the year ends up on average being reflected in either conventional tax avoidance,
uncertain tax avoidance, or cash taxes paid. Settlements is reflected as a negative number and
reflects cash taxes paid that are not related to the current year pretax earnings. Because all of the
items reflected in equation (2) have to equal potential tax expense (i.e., equation (2) is an
identity) all of the coefficients on PotentialTax have to sum to one. Mathematically this means
that the coefficients in equations (3) through (6) must satisfy the following constraint:
𝛽𝐶 + 𝛽𝑈 + 𝛽𝑆𝑒𝑡𝑡 + 𝛽𝐶𝑇𝑃 = 1, (7)
As demonstrated in Chang et al. (2014), estimating equations (3) through (6) with the same
independent variables is equivalent to imposing the constraint (7) on the results.11
10 Chang et al. (2014) also include control variables in their regressions. We control for industry by using industry
fixed effects. Other controls such as multinational status, R&D intensity, financial constraint, and tax haven activity
are used to partition our sample and are therefore not included as control variables in the regressions. 11 We demonstrate in our results section that (7) is satisfied in our data.
11
3. Sample and Regression Results
In this section we explain our sample selection procedure, present descriptive statistics of
our data, and present the results of our regression tests. Our initial sample includes all
Compustat observations from 2008 to 2015. We exclude observations with negative total cash
tax paid (TXPD) or negative pre-tax book income (PI) because tax avoidance by firms with
losses (or negative taxable income) is expected to differ from that of profitable firms. We also
exclude firms where total tax avoidance (the sum of Uncertain + Conventional) is negative
because these firms are not likely "tax avoiders" in that they are paying taxes at a rate in excess
of the 35% U.S. statutory rate. We also exclude firm-years with missing UTB data.12 Finally,
we trim the following variables (scaled by lagged total assets) at the top and bottom one percent
of observations: total tax avoidance (sum of Uncertain + Conventional); pretax income; and
CashTaxPaid. After applying these data screens we are left with 9,023 firm-year observations
from 2,581 firms with the data necessary to estimate our regressions. Table 1 presents the
sample selection procedure.
[Insert Table 1 Here]
Table 2 shows descriptive statistics for the full sample. The average cash ETR is 20.5%
and the average GAAP ETR is 21.8%, which are lower than those found in prior studies. This is
due to our requirement that total tax avoidance (the sum of Uncertain + Conventional) be
positive. In other words, all of our sample firms are tax avoiders to some extent.
[Insert Table 2 Here]
Panel B of Table 2 reports results of estimating equations (3) through (6) for our full
sample. Consistent with the constraint in (7), all of the coefficients sum to 1:
12 We consider a firm-year as having no UTB data if it has neither beginning (TXTUBBEGIN) nor ending UTB
balance (TXTUBEND).
12
0.3518778 + 0.0232075 – 0.0085678 + 0.6334825 = 1.0000000
The Table 2 results demonstrate that on average each additional dollar of potential tax
results in 62.4 cents of cash taxes paid net of settlements (63.3 cents – 0.9 cents) and 37.6 cents
of total tax avoided (100 – 62.4). Of the 37.6 cents of tax avoided, 35.2 cents represents what we
have termed conventional tax avoidance, and 2.3 cents13 represents additions to the UTB reserve
and is therefore considered to be uncertain. The 2.3 cents represents 6.12% of the total tax
avoided (2.3/37.6 = 6.12%).
To investigate how these results differ for firms that are more extreme tax avoiders, we
partition our sample into two parts: those that are more or less financially constrained. Our
measure of financial constraint for this purpose is the median HP index developed by Hadlock
and Pierce (2010), calculated as – 0.737*size + 0.043*size2 – 0.040*age, where size is the
natural log of total assets (AT) adjusted by the inflation rate,14 and age is the number of years a
firm is listed on Compustat with a non-missing stock price. Size is winsorized at 4.5 billion and
age is winsorized at 37 years. Results for this sample are reported in Table 3.
[Insert Table 3 Here]
Panel A of Table 3 reports descriptive statistics for the two sub-samples. Consistent with
Edwards et al. (2016) the firms with high financial constraint have lower cash ETRs than the
firms with low financial constraint. Consistent with Law and Mills (2015) the firms with high
financial constraint have higher UTB reserves than the firms with low financial constraint.
Panel B of Table 3 reports the regression results for the two sub-samples. The Table 3
results demonstrate that on average each additional dollar of potential tax for the high (low)
constraint firms results in 60.1 (71.7) cents of cash taxes paid net of settlements, 37.6 (26.7)
13 35.2 and 2.3 do not add up exactly to 37.6 due to rounding. 14 2000 is the benchmark year. Inflation index is from the Federal Reserve web page.
13
cents of conventional tax avoided, and 2.4 (1.6) cents of uncertain tax avoided. Thus, consistent
with both Edwards et al. (2016) and Law and Mills (2015) we find the financially constrained
firms are exhibit significantly more overall tax avoidance and uncertain tax avoidance. However,
the uncertain tax avoidance as a percentage of total tax avoided for the high (low) constraint
firms is 6.0% (5.7%). Thus, firms that are more financially constrained have a higher percentage
of tax avoidance that is uncertain, although the vast majority of their additional tax avoidance is
what we have termed conventional.
We next partition our sample into those firms that hove operations in tax haven countries
and those that do not, and report these results in Table 4. We obtain data on tax haven operations
from Scott Dyreng's web site. Panel A of Table 4 reports descriptive statistics for the two sub-
samples. The firms with operations in tax havens have lower cash ETRs and higher levels of
UTB reserves than the firms that do not have tax haven operations.
[Insert Table 4 Here]
Panel B of Table 4 reports the regression results for the two sub-samples. The Table 4
results demonstrate that on average each additional dollar of potential tax for the haven (non-
haven) firms results in 63.4 (69.3) cents of cash taxes paid net of settlements, 34.2 (28.3) cents of
conventional tax avoided, and 2.4 (2.4) cents of uncertain tax avoided. The uncertain tax
avoidance as a percentage of total tax avoided for the haven (non-haven) firms is 6.6% (7.8%).
Thus, firms that have operations in tax havens have a lower percentage of tax avoidance that is
uncertain; the vast majority of their additional tax avoidance is what we have termed
conventional.
We next partition our sample into those firms that are considered to be multinational and
those considered to be domestic, and report these results in Table 5. We classify a firm as
14
multinational if it reports non-zero foreign pretax income (PIFO) on Compustat. We classify a
firm as domestic if it is not multinational. Panel A of Table 5 reports descriptive statistics for the
two sub-samples. The multinational firms have higher cash ETRs and higher UTB reserves than
the domestic firms.
[Insert Table 5 Here]
Panel B of Table 5 reports the regression results for the two sub-samples. The Table 5
results demonstrate that on average each additional dollar of potential tax for the multinational
(domestic) firms results in 60.0 (66.4) cents of cash taxes paid net of settlements, 37.2 (32.0)
cents of conventional tax avoided, and 2.8 (1.6) cents of uncertain tax avoided. The uncertain
tax avoidance as a percentage of total tax avoided for the multinational (domestic) firms is 7%
(4.8%). Thus, multinational firms that have a higher percentage of tax avoidance that is
uncertain; although the vast majority of their additional tax avoidance is what we have termed
conventional.
Finally, we consider the effect of R&D expense and tax haven operations jointly,
partitioning our sample into four sub-samples: (1) tax haven operations and high R&D expense;
(2) tax haven operations and low R&D expense; (3) non-haven operations and high R&D
expense; and (4) non-haven operations and low R&D expense. Table 6 reports regression results
for these four sub-samples.
[Insert Table 6 Here]
The Table 6 results for the haven and high R&D sub-sample demonstrate that on average
each additional dollar of potential tax results in 56.3 cents of cash taxes paid net of settlements.
This is the lowest of any of our sub-samples. This sub-sample also reports 41.0 cents of
15
conventional tax avoided, and 2.6 cents of uncertain tax avoided. The uncertain tax avoidance as
a percentage of total tax avoided for these haven and high R&D firms is 6%.
Contrast this result with that for the non-haven and high R&D sub-sample. Results for
this subsample demonstrate that on average each additional dollar of potential tax results in 70.5
cents of cash taxes paid net of settlements. This is the second highest of any of our sub-samples,
exceeded only by the low financial constraint sub-sample in Table 3. This non-haven and high
R&D sub-sample also reports 26.7 cents of conventional tax avoided, and 2.8 cents of uncertain
tax avoided. The uncertain tax avoidance as a percentage of total tax avoided for these non-
haven and high R&D firms is 9.5%.
Results from Table 6 therefore demonstrate that the group of firms with the lowest
percent of potential tax that is paid in cash is also the group with the lowest percent of uncertain
tax avoidance. In other words, reducing cash taxes paid for this group is mainly done using what
we have termed conventional tax avoidance, despite the fact that this group appears to have the
highest level of tax avoidance of any of our sub-samples.
4. Additional Tests
Hasan, Hoi, Wu and Zhang (2014) document a positive relation between high levels of
tax avoidance and the cost of bank loans. They conclude that banks perceive high levels of tax
avoidance as risky. They use three measures of tax avoidance that are common in the tax
accounting literature. Specifically, they use total book-tax differences (BT), a measure of
discretionary permanent book-tax differences developed by Frank, Lynch, and Rego (2009)
(DTAX), and the cash effective tax rate (CETR). To investigate how their measures of tax
avoidance map into conventional and uncertain tax avoidance, we split our sample based on
16
these three measures and estimate the same set of regressions. This analysis differs from our
main tests that focus on sub-samples of firms identified in prior research as engaging in greater
amounts of tax avoidance based on a particular firm characteristic (e.g. financial constraint). In
these tests, we sort firms directly based on measures of tax avoidance into high and low tax
avoidance groups. The purpose of this additional analysis is to see whether any of these
traditional measures of tax avoidance result in firms being sorted into the high tax avoidance
group that also exhibit a greater mix of uncertain tax avoidance relative to conventional tax
avoidance. The results are reported in Table 7.
[Insert Table 7 Here]
In Table 7, Panel A we split the sample into high and low cash ETR partitions, where
median cash ETR in high partition is 29.2% and median cash ETR in low partition is 9.74%.
Results demonstrate that on average each additional dollar of potential tax for the high (low)
cash ETR firms results in 79.8 (28.9) cents of cash taxes paid net of settlements, 19.1 (67.0)
cents of conventional tax avoidance, and 1.2 (4.1) cents of uncertain tax avoidance. Consistent
with Dyreng et al. (2016), we find the low cash ETR firms exhibit significantly greater amounts
of uncertain tax avoidance. However, the uncertain tax avoidance as a percentage of total tax
avoided for the high (low) cash ETR firms is 5.9% (5.8%). Therefore, consistent with our main
results, the majority of additional tax avoidance exhibited by low cash ETR firms is being
achieved through conventional channels. The fact that increased tax savings does not appear to
be associated with increased uncertainty is consistent with the finding in Goh, Lee, Lim, and
Shevlin (2016) that low tax rate firms actually exhibit a lower cost of capital.
Table 7, Panels B and C show similar results. The high book-tax difference firms engage
in significantly more overall tax avoidance than the low book-tax difference firms, but there is no
17
difference in the amount of uncertain tax avoidance. In Panel C the high DTAX firms exhibit
more overall tax avoidance, but again, there is not a significant difference in the amount of
uncertain tax avoidance between the high and low DTAX groups. Overall, our results suggest
these measure do a good job sorting firms on their overall level of tax avoidance, but these
measures are not necessarily a good signal of uncertain tax avoidance.
5. Conclusion
We investigate whether higher levels of tax avoidance by U.S. corporations are, at the
margin, more uncertain than lower levels of tax avoidance as reflected in increases in firms' UTB
reserves. We identify marginal tax avoidance by looking at financially constrained firms, firms
with operations in tax havens, and multinational firms.
We use a system of equations (Chang et al. 2014) to determine how much of each
marginal dollar of potential tax, on average, is represented by cash taxes paid, uncertain tax
avoidance, or conventional tax avoidance. We find that each additional dollar of potential tax is
associated on average with 62.4 cents of cash taxes paid (net of settlements), 2.3 cents of
uncertain tax avoidance, and 35.2 cents of conventional tax avoidance. The 2.3 cents of
uncertain tax avoidance represents 6.1% of total tax avoidance: 2.3/(2.3+35.2) = 6.1%.
The group of firms that has the lowest percentage of potential tax paid in cash is the
group with tax haven operations and high R&D expense. This group pays on average 56.3 cents
for each additional dollar of potential tax, but only 2.6 cents of each additional dollar of potential
tax represents an addition to the UTB reserve, or 6.0% of the total tax avoided. Compare this
with the entire sample, which pays on average 62.4 cents for each additional dollar of potential
tax, and for which 2.3 cents of each additional dollar of potential tax results in an addition to the
18
UTB reserve, or 6.1% of the total tax avoided. This result suggests that marginal tax avoidance
may not result in a larger percent of each additional dollar of potential tax increasing the UTB
reserve.
Possible explanations are: (1) higher tax avoidance requires managerial effort, and
managers may not have sufficient incentives to pursue additional tax avoidance; (2) up-front
costs may be increasing in the level of avoidance, thus reducing the potential benefit of the
additional tax savings; (3) external stakeholders may exert pressure on managers to limit tax
avoidance, either because of potential agency costs or due to the negative reputational effects the
firm may face; or (4) managers may be more reluctant to record a UTB reserve because doing so
reduces the potential financial reporting benefit of the tax savings.
Our study makes two important contributions to accounting research by (1)
demonstrating a technique for inferring how much of marginal tax avoidance is related to
uncertain positions that are reflected in the UTB reserve, and (2) demonstrating that, at least for
our sample and time period, the majority of the additional tax avoidance by firms is not
uncertain. This result suggest differences in marginal tax avoidance across firms are more likely
a function of differences in managers’ incentives to pursue tax avoidance or firm characteristics
that facilitate tax avoidance rather than differences in the willingness to pursue uncertain or
aggressive tax strategies.
We note the inferences from our study are limited by the quality of the UTB reserve as a
measure of tax uncertainty. Using the UTB reserve for this purpose has three potential problems.
First, firms engaged in higher levels of tax avoidance may be reluctant to increase UTB reserves
if they believe doing so would lead to more scrutiny from the tax authority. Second, firms
engaged in more tax avoidance may be unwilling to record a reserve against the benefits of the
19
incremental tax avoidance if they are focused on increasing after-tax income in the current
period. Both of these factors could mask the fact that greater levels of tax avoidance are actually
associated with more uncertainty. Third, variation in the application of the FIN 48 requirements
across firms may limit our ability to use UTB reserves to compare tax uncertainty across firms.
Evidence on the usefulness of UTB reserves as a measure of tax uncertainty is mixed.15
15 Lisowsky, Robinson, and Schmidt (2013) find a positive association between identified tax shelters and UTB
reserves. This finding suggests UTB reserves are a useful measure of aggressive or potentially uncertain types of tax
avoidance. However, De Simone, Robinson, and Stomberg (2013) examine 19 paper companies that received the
same refundable excise tax credit and document significant variation in the application of FIN 48 to that tax
position. They suggest caution should be exercised in comparing tax reserves across firms. Further, Robinson,
Stomberg, and Towery (2016) find that over a three-year period only 26 cents of every dollar of UTB reserves
unwind as a tax settlement. In contrast, Ciconte, Donohoe, Lisowsky, and Mayberry (2016) find UTBs are predictive
of future cash outflows and that this relation converges to one over a five-year period. In short, the evidence on the
usefulness and comparability of UTB reserves is mixed.
20
Appendix A: Variable Definitions
Variable Definition
Potential Tax
Tax liability a firm potentially bears under U.S. statutory tax rate,
calculated as pretax book income (pi) multiplied by 35% plus state income
tax (txs), then scaled by lagged total assets (at)
Conventional
Taxes avoided from potential tax through conventional (i.e., not uncertain)
tax avoidance strategies, calculated as Potential Tax less Uncertain plus
Settle less Cash Tax Paid. Uncertain, Settle and Cash Tax Paid are defined
below.
Uncertain
Tax avoided from potential tax through uncertain tax avoidance strategies,
calculated as UTB increase in current positions (txtubposinc) scaled by
lagged total assets (at)
Settle UTB decrease due to settlements with the IRS, calculated as UTB
settlements (txtubsettle) scaled by lagged total assets (at)
Cash Tax Paid Taxes paid by a firm in a year, calculated as income taxes paid (txpd)
scaled by lagged total assets (at)
HP index
financial constraint index developed by Hadlock and Pierce (2010),
calculated as -0.737*size+0.043*size^2-0.04*age, where size is the natural
log of total assets and age is the number of years a firm is listed on
Compustat. Size is winsorized at $4.5 billion and age is winsorized at 37
years. Total assets are deflated using 2000's dollar value. GDP deflators
are obtained from the Federal Reserve webpage.
R&D Research and development expense, calculated as research and
development expense (xrd) scaled by lagged total assets (at)
Foreign the ratio of foreign pretax book income (pifo) to pretax book income (pi),
calculated as foreign pretax book income (pifo)/pretax book income (pi)
Cash ETR Cash tax paid (txpd) over pretax book income (pi)
STD_Cash ETR The standard deviation of a firm's cash ETR over the sample period
GAAP ETR Income taxes (txt) over pretax book income (pi)
UTB Level Year-end UTB balance (txtubend) scaled by lagged total assets (at)
Financial Constraint Partition A firm-year is defined as High Financial Constraint if its HP index is
above the median HP index over all firm-years.
Haven Partition
A firm-year is defined as Haven if it reports at least one subsidiary in tax
haven jurisdictions. Tax haven data are obtained from Scott Dyreng's
personal webpage.
Multinational vs. Domestic
Partition
A firm-year is defined as Multinational if it has non-zero Foreign. Foreign
is defined above. A firm-year is defined as Domestic if Foreign equals to
zero.
High/Low R&D Partition A firm-year is defined as having high R&D if its R&D is above the
median R&D over all firm-years. R&D is defined above.
Book-Tax Difference (BT)
Manzon and Plesko (2002) book-tax difference measure; BT=domestic
pretax income (pidom) – federal income tax (txfed)/statutory tax rate –
state income tax (txs) – other income tax (txo) – equity in earnings from
unconsolidated subsidiaries (esub), scaled by lagged total assets (at)
21
DTAX
Frank, Lynch and Rego (2009)’s discretionary permanent book-tax
difference measure; DTAX is the error term from the following regression
estimated by each industry-year: PERM=β0+ β1INTANG+ β2UNCON+
β3MI+ β4CSTE+ β5∆NOL+ β6lag_PERM+ε, where PERM=BI-
[(CFTE+CFOR)/STR]-(DTE/STR). BI is pre-tax book income (pi); CFTE
is current income tax (txfed); CFOR is foreign income tax (txfo); DTE is
deferred tax expense (txdi); STR is statutory tax rate, which is constantly
35% in our sample period; INTANG is goodwill (gdwl) plus other
intangibles (intano); UNCON is equity in earnings from unconsolidated
subsidiaries (esub0; MI is income (loss) attributable to minority interest
(mii); CSTE is state income tax (txs); ∆NOL is change in net operating
loss carry forwards (tlcf)
22
Appendix B:
The Chang et al. (2014) system of equations
We follow the approach used by Chang et al. (2014) to estimate the uses of internally
generated cash flows. The starting point in Chang et al. is the cash flow identity from the cash
flow statement, defined as:
𝐼𝑛𝑣𝑡 + ∆𝐶𝑎𝑠ℎ𝑡 + 𝐷𝑖𝑣𝑡 − ∆𝐷𝑡 − ∆𝐸𝑡 = 𝐶𝐹𝑡, (B1)
where the uses of cash include net new investment (Inv), the net increase in cash holdings
(Cash) and the payment of cash dividends (Div). Sources of cash can be either internal or
external. External sources of cash are the issuance of new debt, net of debt repayments, (D)
and the issuance of new equity, net of stock repurchases (E). Internally generated cash is cash
flow from operations (CF). As expressed in Equation (B1), the total sources of cash are
CF + D + E. However, it is possible for either (or both) D and E to be negative, in which
case CF + (-D) + (-E) represents the net source of cash after repayment of debt (-D) and
stock repurchases (-E).
Chang et al. regress the different uses of cash (Inv, Cash, etc.) on operating cash flow
(CF) and a set of control variables. They estimate a system of five regression equations as
follows:
𝐼𝑛𝑣𝑖𝑡 = 𝛽𝐼𝑛𝑣𝐶𝐹𝑖𝑡 + 𝛾𝐼𝑛𝑣𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖𝑡−1 + 𝜀𝑖𝑡𝐼𝑛𝑣, (B2)
∆𝐶𝑎𝑠ℎ𝑖𝑡 = 𝛽∆𝐶𝑎𝑠ℎ𝐶𝐹𝑖𝑡 + 𝛾∆𝐶𝑎𝑠ℎ𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖𝑡−1 + 𝜀𝑖𝑡∆𝐶𝑎𝑠ℎ, (B3)
𝐷𝑖𝑣𝑖𝑡 = 𝛽𝐷𝑖𝑣𝐶𝐹𝑖𝑡 + 𝛾𝐷𝑖𝑣𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖𝑡−1 + 𝜀𝑖𝑡𝐷𝑖𝑣, (B4)
∆𝐷𝑖𝑡 = 𝛽∆𝐷𝐶𝐹𝑖𝑡 + 𝛾∆𝐷𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖𝑡−1 + 𝜀𝑖𝑡∆𝐷, (B5)
∆𝐸𝑖𝑡 = 𝛽∆𝐸𝐶𝐹𝑖𝑡 + 𝛾∆𝐸𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖𝑡−1 + 𝜀𝑖𝑡∆𝐸. (B6)
23
The coefficient on CF represents how operating cash flow is used on average across the five
different sources and uses of cash. Because all of the sources and uses of cash reflected in
Equation (B1) have to equal operating cash flow (i.e., equation (B1) is an identity) all of the
coefficients on CF have to sum to one. Mathematically this means that the coefficients in
Equations (B2) through (B6) must satisfy the following constraints:
𝛽𝐼𝑛𝑣 + 𝛽∆𝐶𝑎𝑠ℎ + 𝛽𝐷𝑖𝑣 + 𝛽∆𝐷 + 𝛽∆𝐸 = 1, (B7)
and
𝛾𝐼𝑛𝑣 + 𝛾∆𝐶𝑎𝑠ℎ + 𝛾𝐷𝑖𝑣 + 𝛾∆𝐷 + 𝛾∆𝐸 = 0. (B8)
According to Chang et al. (2014, 3633) "the adding up constraint [B7] reflects the
accounting identity that sources of cash equal uses of cash. In other words, a one-dollar increase
in internal cash flow needs to be used to increase investment, increase cash holding, pay
dividends, or reduce outstanding debt or equity." Constraint (B8) stipulates "that the total
response across different sources and uses of funds must sum to zero if the shock stems from an
exogenous or predetermined variable that represents neither a source or use of funds in the
current period." Here is how Chang et al. explain the constraint in (B8): Suppose the coefficient
on Controls is 0.1 in Equation (B2), suggesting that investment increases by 10% of total assets
if Controls increases by one. Because investment is a use of cash and total uses of cash must be
equal to the total sources of cash, the net effect of the increase in Controls on other use variables
must sum to –10% of total assets.
According to Chang et al. (2014, 3633), if the variables in Equation (B1) are consistently
defined so that the cash flow identity holds implicitly in the data, constraints (B7) and (B8)
"should hold automatically and need not be imposed explicitly in the estimation. Furthermore,
Equations [B2] – [B6] can be estimated simultaneously using seemingly unrelated regressions
24
(SUR), because each equation in the system has its own dependent variable and the explanatory
variables in all equations are either exogenous or predetermined. Greene (2012) suggests that
SUR estimates are equivalent to equation-by-equation OLS estimates if the same set of
explanatory variables is included in each equation, which is precisely the case in Equations [B2]
– [B6]." Chang et al. confirm this result in their study by estimating equations (B2) – (B6)
simultaneously using SUR and imposing constraints (B7) and (B8).
25
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28
Table 1
Sample Selection Procedure: Full Sample
Number
of Firm-
Years
All firm-years with necessary data on Compustat from 2008 to 2015 42,770
missing UTB data -26,006
negative year-end UTB balance -5
negative total cash tax paid or pre-tax book income -5,278
extreme values (top and bottom 1% of potential tax/assets, pi/assets and
cash tax paid/assets) -427
non-positive total tax avoidance -2,031
Final Sample Size 9,023
Unique Firms 2,581
29
Table 2
Results for Full Sample
Panel A: Full Sample Descriptive Statistics (N=9,023)
Variable Mean STD MIN P25 P50 P75 MAX
Potential Tax 0.043 0.032 0.001 0.021 0.035 0.056 0.206 Conventional 0.018 0.025 -0.059 0.006 0.013 0.023 1.539 UTB increase - current (Uncertain) 0.002 0.004 0.000 0.000 0.001 0.002 0.115 Settle 0.001 0.016 -0.002 0.000 0.000 0.000 1.460 Cash Tax Paid 0.025 0.025 0.000 0.006 0.017 0.034 0.155 HP index -3.776 0.602 -4.757 -4.317 -3.734 -3.321 -1.713 R&D 0.029 0.050 0.000 0.000 0.003 0.038 0.553 Foreign 0.294 0.729 -13.738 0.000 0.100 0.523 37.233 Cash ETR 0.205 0.140 0.000 0.108 0.210 0.295 6.508 STD_Cash ETR 0.072 0.060 0.000 0.039 0.063 0.091 1.790 GAAP ETR 0.218 0.755 -23.853 0.202 0.307 0.365 22.941 UTB Level (UTB/lag_assets) 0.013 0.025 0.000 0.002 0.007 0.015 1.037
Panel B: Full Sample Regressions (N=9,023)
Equation (3) Equation (4) Equation (5) Equation (6)
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.352 0.023 0.009 0.633
(47.71) (16.56) (1.61) (125.65)
r-squared 0.204 0.033 0.002 0.637
Year FE Yes Yes Yes Yes
All variables defined in Appendix A
t-statistics in parentheses
30
Table 3
Partitioned Sample based on Financial Constraint
Panel A: Descriptive Statistics (N=8,650)
Variable High Financial Constraint Low Financial Constraint
N Mean STD Median N Mean STD Median
Potential Tax 4,325 0.045 0.034 0.036 4,325 0.042 0.028 0.035
Conventional 4,325 0.020 0.031 0.014 4,325 0.015 0.014 0.012
UTB increase - current (Uncertain) 4,325 0.002 0.005 0.000 4,325 0.002 0.003 0.001
Settle 4,325 0.001 0.023 0.000 4,325 0.001 0.003 0.000
Cash Tax Paid 4,325 0.024 0.027 0.015 4,325 0.026 0.023 0.020
HP index 4,325 -3.273 0.335 -3.321 4,325 -4.279 0.329 -4.317
R&D 4,325 0.036 0.056 0.006 4,325 0.022 0.037 0.003
Foreign 4,325 0.262 0.900 0.028 4,325 0.331 0.527 0.201
Cash ETR 4,325 0.192 0.158 0.191 4,325 0.221 0.119 0.230
STD_Cash ETR 3,929 0.074 0.060 0.067 4,187 0.068 0.059 0.061
GAAP ETR 4,325 0.187 0.839 0.310 4,325 0.250 0.664 0.305
UTB Level (UTB/lag_assets) 4,325 0.014 0.032 0.006 4,325 0.012 0.015 0.007
31
Table 3 (continued)
Partitioned Sample based on Financial Constraint
Panel B: High/Low Financial Constraint Regressions (N=8,650)
Equation (3) Equation (4) Equation (5) Equation (6)
High Financial Constraint (N=4,325)
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.376 0.024 0.010 0.611
(29.61) (10.67) (1.03) (82.74)
r-squared 0.170 0.027 0.002 0.614
Year FE Yes Yes Yes Yes
Low Financial Constraint (N=4,325)
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.267 0.016 0.003 0.720
(39.43) (10.52) (1.42) (107.09)
r-squared 0.2705 0.037 0.005 0.727
Year FE Yes Yes Yes Yes
Difference in Coefficient 0.110 0.007 0.008 -0.109
24.33*** 2.71* 0.51 31.34***
All variables defined in Appendix A
t-statistics in parentheses
High (Low) financial constraint observations have HP Index above (below) the median
32
Table 4
Partitioned Sample based on Activities in Tax Havens
Panel A: Descriptive Statistics (N=5,401)
Variable Haven Non-Haven
N Mean STD Median N Mean STD Median
Potential Tax 4,033 0.043 0.030 0.036 1,368 0.043 0.031 0.036
Conventional 4,033 0.017 0.018 0.013 1,368 0.016 0.044 0.011
UTB increase - current (Uncertain) 4,033 0.002 0.004 0.001 1,368 0.005 0.005 0.000
Settle 4,033 0.001 0.005 0.000 1,368 0.001 0.039 0.000
Cash Tax Paid 4,033 0.025 0.023 0.019 1,368 0.027 0.027 0.019
HP index 3,970 -3.910 0.565 -3.837 1,336 -3.699 0.558 -3.697
R&D 4,033 0.034 0.049 0.012 1,368 0.019 0.040 0.000
Foreign 4,033 0.434 0.709 0.363 1,368 0.130 1.167 0.000
Cash ETR 4,033 0.209 0.122 0.215 1,368 0.218 0.127 0.233
STD_Cash ETR 3,773 0.070 0.069 0.060 1,215 0.068 0.060 0.058
GAAP ETR 4,033 0.226 0.564 0.288 1,368 0.218 1.001 0.344
UTB Level (UTB/lag_assets) 4,033 0.016 0.021 0.009 1,368 0.009 0.024 0.005
33
Table 4 (continued)
Partitioned Sample based on Activities in Tax Havens
Panel B: Haven/Non-Haven Regressions (N=5,401)
Equation (3) Equation (4) Equation (5) Equation (6)
Haven (N=4,033)
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.342 0.024 -0.001 0.633
(45.82) (11.45) (-0.19) (87.70)
r-squared 0.347 0.039 0.002 0.657
Year FE Yes Yes Yes Yes
Non-Haven (N=1,368)
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.283 0.024 0.049 0.742
(7.37) (5.84) (1.39) (59.79)
r-squared 0.0418 0.030 0.006 0.726
Year FE Yes Yes Yes Yes
Difference in Coefficient 0.059 0.001 -0.049 -0.109
1.25 0 1.17 19.22***
All variables defined in Appendix A
t-statistics in parentheses
Tax haven variable taken from Scott Dyreng's web site
34
Table 5
Partitioned Sample based on Multinational Status
Panel A: Descriptive Statistics (N=9,023)
Variable Multinational Domestic
N Mean STD Median N Mean STD Median
Potential Tax 6,087 0.043 0.030 0.035 2,936 0.043 0.034 0.034
Conventional 6,087 0.017 0.018 0.013 2,936 0.018 0.034 0.012
UTB increase - current (Uncertain) 6,087 0.002 0.005 0.001 2,936 0.001 0.003 0.000
Settle 6,087 0.001 0.005 0.000 2,936 0.001 0.027 0.000
Cash Tax Paid 6,087 0.024 0.023 0.018 2,936 0.025 0.029 0.015
HP index 5,872 -3.844 0.598 -3.797 2,778 -3.633 0.586 -3.600
R&D 6,087 0.036 0.052 0.015 2,936 0.014 0.041 0.000
Foreign 6,087 0.435 0.852 0.358 2,936 0.000 0.000 0.000
Cash ETR 6,087 0.207 0.121 0.211 2,936 0.200 0.174 0.208
STD_Cash ETR 5,792 0.072 0.064 0.063 2,678 0.071 0.051 0.062
GAAP ETR 6,087 0.227 0.670 0.287 2,936 0.200 0.907 0.349
UTB Level (UTB/lag_assets) 6,087 0.015 0.022 0.008 2,936 0.009 0.029 0.003
35
Table 5 (continued)
Partitioned Sample based on Multinational Status
Panel B: Multinational/Domestic Regressions (N=9,023)
Equation (3) Equation (4) Equation (5) Equation (6)
Multinational (N=6,087)
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.372 0.028 0.001 0.601
(59.50) (14.20) (0.45) (98.28)
r-squared 0.373 0.036 0.002 0.614
Year FE Yes Yes Yes Yes
Domestic (N=2,936)
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.320 0.016 0.020 0.684
(18.40) (9.48) (1.39) (77.72)
r-squared 0.106 0.040 0.003 0.674
Year FE Yes Yes Yes Yes
Difference in Coefficient 0.052 0.011 -0.019 -0.083
3.75* 3.63* 1.40 14.54***
All variables defined in Appendix A
t-statistics in parentheses
36
TABLE 6 Haven R&D Intersections
Haven and High R&D (N=2,234)
Equation (3) Equation (4) Equation (5) Equation (6)
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.410 0.026 -0.008 0.555
(36.54) (7.54) (-1.72) (52.07)
r-squared 0.384 0.033 0.004 0.550
Year FE Yes Yes Yes Yes
Haven and Low R&D (N=1,799)
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.267 0.020 0.006 0.719
(29.05) (9.44) (2.65) (80.66)
r-squared 0.322 0.056 0.009 0.785
Year FE Yes Yes Yes Yes
All variables defined in Appendix A
t-statistics in parentheses
37
TABLE 6 Haven R&D intersections (Continued)
Non-Haven and High R&D (N=466)
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.267 0.028 0.005 0.710
(11.38) (3.87) (2.36) (28.96)
r-squared 0.226 0.039 0.024 0.651
Year FE Yes Yes Yes Yes
Non-Haven and Low R&D (N=902)
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.290 0.021 0.070 0.758
(5.19) (4.35) (1.34) (54.45)
r-squared 0.036 0.029 0.009 0.770
Year FE Yes Yes Yes Yes
All variables defined in Appendix A
t-statistics in parentheses
38
TABLE 7 Additional Tests - Tax Aggressiveness
Panel A
High Cash ETR (N=4,511), Median=29.2%
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.191 0.012 -0.003 0.795
(52.02) (8.92) (-1.41) (236.34)
r-squared 0.379 0.025 0.006 0.926
Year FE Yes Yes Yes Yes
Low Cash ETR (N=4,512), Median=9.74%
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.670 0.041 0.023 0.312
(53.29) (15.98) (2.07) (63.55)
r-squared 0.390 0.056 0.003 0.476
Year FE Yes Yes Yes Yes
Difference in Coefficient -0.479 -0.030 -0.026 0.483
463.91*** 19.84*** 2.32 1244.9***
All variables defined in Appendix A
t-statistics in parentheses
39
TABLE 7 Additional Tests - Tax Aggressiveness (Continued)
Panel B
High book-tax difference (N=2,918)
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.419 0.027 0.002 0.556
(43.07) (9.96) (0.56) (59.40)
r-squared 0.393 0.037 0.002 0.549
Year FE Yes Yes Yes Yes
Low book-tax difference (N=2,918)
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.306 0.031 0.001 0.664
(38.81) (11.02) (0.43) (82.26)
r-squared 0.347 0.049 0.008 0.700
Year FE Yes Yes Yes Yes
Difference in Coefficient 0.113 -0.004 0.001 -0.107
19.89*** 0.350 0.040 17.58***
All variables defined in Appendix A
t-statistics in parentheses
40
TABLE 7 Additional Tests - Tax Aggressiveness (Continued)
Panel C
High DTAX (N=2,999)
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.417 0.026 0.001 0.557
(43.16) (9.06) (0.14) (60.15)
r-squared 0.395 0.038 0.002 0.495
Year FE Yes Yes Yes Yes
Low DTAX (N=3,000)
Variable Conventional Uncertain Settle CashTaxPaid
PotentialTax 0.240 0.018 0.000 0.743
(31.16) (7.68) (0.28) ( 98.26)
r-squared 0.248 0.025 0.004 0.764
Year FE Yes Yes Yes Yes
Difference in Coefficient 0.177 0.009 0.000 -0.186
52.20*** 1.450 0.000 58.60***
All variables defined in Appendix A
t-statistics in parentheses