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Internal Risk Assessment Quality and Corporate Tax Aggressiveness

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Title:Internal Risk Assessment Quality and Corporate Tax Aggressiveness
Authors:Trent Krupa
Keywords:Tax Aggressiveness
Risk Assessment Quality
Uncertain Tax Positions
Internal Information Quality
Fin 48
Date Issued:04 Aug 2020
Abstract:Tax aggressiveness affects both before- and after-tax cash flow through political costs, reputational effects, or higher risk investments in locations or assets. Assessment of the pre-tax costs requires information outside of the tax or accounting function's expertise. I examine the effect of regulations enhancing firms' internal risk assessment process on firms' tax aggressiveness. Specifically, between 2013 and 2017, U.S. state insurance regulators implemented regulations requiring insurers to identify, assess, and report firm-wide risks to top management and the board of directors. Ex ante, the relation between risk assessments and tax aggressiveness is unclear given mixed empirical evidence that tax avoidance presents significant risks to firms. On one hand, firms may learn that additional tax benefits add little overall risk, increasing tax aggressiveness. Conversely, firms may identified previously unmeasured risks from tax positions, reducing tax aggressiveness. I find that firms reduce the use of uncertain tax positions, and increase cash taxes paid, when internal risk information is more accessible. I also find that uncertain tax positions are positively associated with firm risk prior to the regulation and the increase in risk information mitigates this positive relationship, suggesting that the enhanced risk assessments enable high-risk firms to limit their tax risk. This finding highlights the possibility that limited evidence of ex-post costs from tax aggressiveness could be due to the endogenous selection of tax avoidance strategies by low risk firms.
Appears in Collections: 05 Taxation

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