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Challenges in Identifying Effects and Determinants of Corporate Tax Avoidance

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Challenges in Identifying Effects and Determinants of Corporate Tax Avoidance Challenges in Identifying Effects and Determinants of Corporate Tax Avoidance Inauguraldissertation zur Erlangung des Doktorgrades der Wirtschafts- und Sozialwissenschaftlichen Fakultät der Universität zu Köln 2017 vorgelegt von Birgit Hüsecken, M.Sc. aus Hagen Referent: Prof. Dr. Michael Overesch, Universität zu Köln Korreferent: Prof. Dr. Christoph Kuhner, Universität zu Köln Tag der Promotion: 02.02.2018 II Vorwort Die vorliegende Arbeit entstand während meiner Tätigkeit als wissenschaftliche Mitarbeiterin am Seminar für ABWL und Unternehmensbesteuerung der Universität zu Köln. Im Oktober 2017 wurde sie von der Wirtschafts- und Sozialwissenschaftlichen Fakultät der Universität zu Köln als Dissertation angenommen. Ihr Zustandekommen wurde geprägt durch die qualifizierte und liebevolle Unterstützung zahlreicher Personen, denen ich aus diesem Grund nun danken möchte. Zuallererst gilt mein herzlichster Dank meinem Doktorvater Herrn Prof. Dr. Michael Overesch . Durch regelmäßige Gespräche und Anmerkungen zu meiner Arbeit hat er es mir stets und uneingeschränkt ermöglicht Fortschritte zu erzielen sowie meine Leistung zu verbessern. Seine konstruktiven Kommentare und motivierenden Ratschläge haben mich nicht nur auf fachlicher sondern auch auf persönlicher Ebene unterstützt. Zudem danke ich Herrn Prof. Dr. Christoph Kuhner für die Erstellung des Zweitgutachtens und Herrn Prof. Dr. Michael Stich für die Übernahme des Vorsitzes der Prüfungskommission. Außerdem möchte ich meinen Wegbegleitern am Seminar danken. Unabhängig von der Dauer der Zusammenarbeit hat jeder einzelne zu der durchgängig freundschaftlichen Arbeitsatmosphäre beigetragen. Das Team hat mir nicht nur in den unterschiedlichsten Phasen meiner Promotion fachlich zur Seite gestanden, sondern auch meine Freizeit bereichert. Namentlich hervorheben möchte ich meinen Ko-Autor Herrn Dr. Alexander Tassius , Herrn Hubertus Wolff , der für jede (statistische) Frage ein offenes Ohr hatte und insbesondere Frau Sabine Schenkelberg , deren Tür mir immer offen stand und mit der mich eine weit über die Arbeit hinausgehende Freundschaft verbindet. Zudem danke ich Frau Tanja Breuer , die mir ebenfalls gerade in der Endphase meiner Promotion seelisch zur Seite stand. Auch meinen weiteren Kolleginnen und Kollegen im ersten Stock des Wiso-Hochhauses möchte ich meinen Dank aussprechen für die Unterhaltungen beim Mittagessen und zwischendurch. Besonders dankbar bin ich auch meiner Familie für ihre bedingungslose Unterstützung auf meinem bisherigen Lebensweg. Meine Eltern Barbara und Michael Hüsecken haben mir stets den notwendigen Rückhalt gegeben, sodass ich mich auf meine Ziele konzentrieren konnte. Meinen ebenfalls promovierten Schwestern Anne und Kristina danke ich dafür, dass sie mir durch alle Zeiten hinweg ein Vorbild waren. Auch Bettina Brich , Katharina Filz , Felicitas Lauer und Varinia Müller möchte ich für die stundenlangen Gespräche und anhaltenden Freundschaften danken. Zuletzt danke ich noch meinem Freund Marcel Schmitz für seine uneingeschränkte Ermutigung und Geduld, ohne die diese Dissertation niemals gedruckt worden wäre. Köln, im Februar 2018 Birgit Hüsecken III Content Chapter 1 Introduction ................................................................................................................................ 1 Chapter 2 The Undersheltering Puzzle and its Persistence over Time ..................................................... 21 Chapter 3 Tax Avoidance through Advance Tax Rulings - Evidence from the LuxLeaks Firms ............ 65 Chapter 4 Effects of Disclosing Tax Avoidance: Capital Market Reaction to LuxLeaks ...................... 112 IV Chapter 1 Introduction 1 Chapter 1 1.1 Motivation and Object of Research ............................................................................... 3 1.2 The Undersheltering Puzzle and its Persistence over Time ........................................ 8 1.2.1 Research Question and Design .................................................................................... 8 1.2.2 Results and Contribution to the Literature ................................................................ 10 1.3 Tax Avoidance through Advance Tax Rulings – Evidence from the LuxLeaks Firms ........................................................................................................................................ 11 1.3.1 Research Question and Design .................................................................................. 11 1.3.2 Results and Contribution to the Literature ................................................................ 12 1.4 Effects of Disclosing Tax Avoidance: Capital Market Reaction to LuxLeaks ........ 13 1.4.1 Research Question and Design .................................................................................. 13 1.4.2 Results and Contribution to the Literature ................................................................ 15 References................................................................................................................................ 17 2 1.1 Motivation and Object of Research It is widely known that tax effects are, in general, hard to identify despite being important to corporations (Frank and Goyal, 2009; Hennessy and Whited, 2005). Yet, the relevance of taxes is indisputable as corporations worldwide engage in various tax avoidance strategies extending from rather unexciting deferral of taxes to highly aggressive tax shelter participation and thereby, lowering their foreign tax rate to low one-digit numbers (Donohoe, McGill, and Outslay, 2012). Thus, well-founded tax research is indispensable. In recent years, media coverage has once more accentuated the need for knowledge about taxes and especially tax avoidance of corporations. Famous examples include Google Inc. employing the widely discussed “Double Irish” and “Dutch Sandwich” structure and Starbucks Corp. shifting its UK income to low-tax jurisdictions for years. 1 Besides those reports about selected – mostly U.S. – corporations, secret tax documents of over 300 multinational corporations (MNCs) have been released by the International Consortium of Investigative Journalists (ICIJ) in 2014. 2 The revealed advance tax rulings (ATRs) offered refined tax structures secured by Luxembourg’s tax authority. Two years later, the Panama Papers have been published uncovering information about further efficient tax avoidance structures. 3 Whether illegal or legal – note that tax avoidance is usually legal –, the reduction of corporate taxes generally evokes a public picture of unfairness. It does not only draw the attention of the public but also of fiscal authorities and governments (Bozanic, Hoopes, Thornock, and Williams, 2016), because it is incompatible with the original intention of tax law (Kadet, 2016). 1 Forbes (2016, December 22), available at https://www.forbes.com/sites/robertwood/2016/12/22/how-google- saved-3-6-billion-taxes-from-paper-dutch-sandwich/#10ea35a91c19 and The Guardian (2015, December 15), available at https://www.theguardian.com/business/2015/dec/15/starbucks-pays-uk-corporation-tax-8-million- pounds. 2 ICIJ (2014, November 5), available at https://www.icij.org/project/luxembourg-leaks/leaked-documents-expose- global-companies-secret-tax-deals-luxembourg. 3 The Guardian (2016, April 5), available at https://www.theguardian.com/news/2016/apr/03/what-you-need-to- know-about-the-panama-papers. 3 Hindering corporate tax avoidance is thus an essential objective for policymakers. Consequently, corporations are confronted with strict domestic and international regulations (e.g. Desai, Dyck, and Zingales, 2007). For example, the U.S. regulators introduced FIN 48 in 2006 to increase the transparency on uncertain tax positions, i.e., unrecognized tax benefits (Blouin and Robinson, 2011) and through its base erosion and profit shifting (BEPS) project the Organization for Economic Cooperation and Development (OECD) released, amongst other measures, actions to align tax systems, restrain certain types of ATRs and increase transparency in tax reporting and transactions (OECD, 2015a). However, even though the implementation into national tax law is in progress, recent cases shed doubt on the success of BEPS and previous regulations. In October 2015, the European Commission ruled – for the first time ever – on the question of illegal state aid in the cases of Fiat in Luxembourg and Starbucks in the Netherlands (European Commission, 2015). Not quite a year later, Apple’s special tax deals in Ireland were also classified by the European Commission as illegal state aid resulting in $ 14.5 billion in back taxes. 4 Thus, not only MNCs are continuously criticized for their behavior, governments and fiscal authorities apparently did not act responsibly, either. True to the motto know your enemy, regulators need to understand every detail in order to impede corporate tax avoidance. Why do MNCs pursue tax avoidance strategies, i.e., why do they oppose the public opinion and policymakers? Why do some corporations avoid taxes more effectively than others? And to what extent are other fiscal authorities involved in corporate tax planning? Especially since the call for more research on tax avoidance in the famous review by Hanlon and Heitzman (2010), researchers worldwide have attempted to provide answers to these questions. 4 The New York Times (2016, August 30), available at http://www.nytimes.com/2016/08/31/technology/apple-tax- eu-ireland.html?_r=0. 4 As anecdotal evidence suggests, many corporations
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