Tax Uncertainty and Marginal Tax Avoidance David A ... · Tax Uncertainty and Marginal Tax Avoidance David A. Guenther, Ryan J. Wilson and Kaishu Wu Lundquist College of Business

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

7

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.


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.


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.



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.



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.


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.


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

References

Cazier, R., S. Rego, X. Tian and R. Wilson. 2015. The impact of increased disclosure

requirements and the standardization of accounting practices on earnings management

through the reserve for income taxes. Review of Accounting Studies 20: 436–469.

Chang, X., S. Dasgupta, G. Wong and J. Yao. 2014. Cash-flow sensitivities and the allocation of

internal cash flow. Review of Financial Studies 27; 3628-3657.

Ciconte, W., M. Donohoe, P. Lisowsky, and M. Mayberry. 2016. Predictable uncertainty: The

relation between unrecognized tax benefits and future income tax cash outflows.

University of Illinois working paper and University of Florida working paper.

Desai, M. and D. Dharmapala. 2006. Corporate tax avoidance and high-powered incentives.

Journal of Financial Economics 79: 145-179.

De Simone, L., J. Robinson, and B. Stomberg. 2013. Distilling the reserve for uncertain tax

positions: The revealing case of black liquor. Review of Accounting Studies 19: 456-472.

Dyreng, S., M. Hanlon, and E. Maydew. 2008. Long-run Corporate Tax Avoidance. The

Accounting Review 83: 61–82.

Dyreng, S., M. Hanlon and E. Maydew. 2016. When Does Tax Avoidance Result in Tax

Uncertainty? Working paper: Duke University, MIT and University of North Carolina at

Chapel Hill.

Dyreng, S., J. Hoopes and J. Wilde. 2016. Public pressure and corporate tax behavior. Journal of

Accounting Research 54: 147-186.

Dyreng, S. and B. Lindsey. 2009. Using financial accounting data to examine the effect of

foreign operations located in tax havens and other countries on U.S. multinational firms'

tax rates. Journal of Accounting Research 47: 1283-1316.

26

Dyreng, S. and K. Markle. 2016. The effect of financial constraints on income shifting by U.S.

multinationals. The Accounting Review: in press.

Edwards, A., C. Schwab and T. Shevlin. 2016. Financial Constraints and Cash Tax Savings. The

Accounting Review: in press.

Financial Accounting Standards Board. 2006. FASB Interpretation No. 48: Accounting for

Uncertainty in Income Taxes; an interpretation of FASB Statement No. 109.

Frank, L., L. Lynch, and S. Rego. 2009. Tax Reporting Aggressiveness and its Relation to

Aggressive Financial Reporting. The Accounting Review 84: 467–496.

Goh, B.W., J. Lee, C.Y. Lim, and T. Shevlin. 2016. The Effect of Corporate Tax Avoidnce on

the Cost of Equity. The Accounting Review. Forthcoming

Greene, W. 2012. Econometric analysis, 7th edition. Upper Saddle River: Prentice-Hall.

Guenther, D., S. Matsunaga, and B. Williams. 2016. Is Tax Avoidance Related to Firm Risk?

The Accounting Review, forthcoming.

Guenther, D., K. Njoroge and B. Williams. 2015. What Do Firms Do With The Cash From Tax

Savings? Working paper, University of Oregon, College of William and Mary, and

Indiana University.

Hadlock, C. and J. Pierce. 2010. New evidence on measuring financial constraints: moving

beyond the KZ Index. The Review of Financial Studies 23: 1909-1940.

Hasan, I., C.K. Hoi, Q. Wu, and H. Zhang. 2014. Beauty is in the Eye of the Beholder: The

Effect of Corporate Tax Avoidance on the Cost of Bank Loans. Journal of Financial

Economics 113: 109-130.

Law, K. and L. Mills. 2015. Taxes and financial constraints: evidence from linguistic cues. \

Journal of Accounting Research 53: 777-819.

27

Linck, J., J. Netter and T. Shu. 2013. Can managers use discretionary accruals to ease financial

constraints? evidence from discretionary accruals prior to investment. The Accounting

Review 88: 2117–2143.

Liswosky, P., L. Robinson, and A. Schmidt. 2013. Do publicly disclosed tax reserves tell us

about privately disclosed tax shelter activity? Journal of Accounting Research 51(3):

583-629.

McGuire, S., D. Wang and R. Wilson. 2014. Dual class ownership and tax avoidance. The

Accounting Review 89: 1487–1516.

Rego, S., and R. Wilson. 2012. Equity Risk Incentives and Corporate Tax Aggressiveness.

Journal of Accounting Research 50: 775–810.

Robinson, L., B. Stomberg, and E. Towery. 2016. One size does not fit all: How the uniform

rules of FIN 48 affect the relevance of income tax accounting. The Accounting Review

91(4): 1194-1217.

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)


High Financial Constraint (N=4,325)


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


Low Financial Constraint (N=4,325)


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


Difference in Coefficient 0.110 0.007 0.008 -0.109

24.33*** 2.71* 0.51 31.34***



High (Low) financial constraint observations have HP Index above (below) the median

32

Table 4

Partitioned Sample based on Activities in Tax Havens


Variable Haven Non-Haven


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


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


33

Table 4 (continued)

Partitioned Sample based on Activities in Tax Havens

Panel B: Haven/Non-Haven Regressions (N=5,401)


Haven (N=4,033)


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


Non-Haven (N=1,368)


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


Difference in Coefficient 0.059 0.001 -0.049 -0.109

1.25 0 1.17 19.22***



Tax haven variable taken from Scott Dyreng's web site

34

Table 5

Partitioned Sample based on Multinational Status


Variable Multinational Domestic


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


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


35

Table 5 (continued)

Partitioned Sample based on Multinational Status

Panel B: Multinational/Domestic Regressions (N=9,023)


Multinational (N=6,087)


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


Domestic (N=2,936)


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


Difference in Coefficient 0.052 0.011 -0.019 -0.083

3.75* 3.63* 1.40 14.54***



36

TABLE 6 Haven R&D Intersections

Haven and High R&D (N=2,234)



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


Haven and Low R&D (N=1,799)


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




37

TABLE 6 Haven R&D intersections (Continued)

Non-Haven and High R&D (N=466)


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


Non-Haven and Low R&D (N=902)


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




38

TABLE 7 Additional Tests - Tax Aggressiveness

Panel A

High Cash ETR (N=4,511), Median=29.2%


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


Low Cash ETR (N=4,512), Median=9.74%


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


Difference in Coefficient -0.479 -0.030 -0.026 0.483

463.91*** 19.84*** 2.32 1244.9***



39

TABLE 7 Additional Tests - Tax Aggressiveness (Continued)

Panel B

High book-tax difference (N=2,918)


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


Low book-tax difference (N=2,918)


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


Difference in Coefficient 0.113 -0.004 0.001 -0.107

19.89*** 0.350 0.040 17.58***



40

TABLE 7 Additional Tests - Tax Aggressiveness (Continued)

Panel C

High DTAX (N=2,999)


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


Low DTAX (N=3,000)


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


Difference in Coefficient 0.177 0.009 0.000 -0.186

52.20*** 1.450 0.000 58.60***



Documents

Tax Uncertainty and Marginal Tax Avoidance David A ... · Tax Uncertainty and Marginal Tax Avoidance David A. Guenther, Ryan J. Wilson and Kaishu Wu Lundquist College of Business