Taxes and Haven Activities: Evidence from Linguistic Cues

Beyond the shell game: Exposing the real operations shrinking corporate taxes

Law, K. K. F., and Mills, L. F. (2022). Taxes and haven activities: Evidence from linguistic cues. The Accounting Review, 97(5), 349-375.

Key takeaways:

This study develops new measures using linguistic cues in company disclosures to identify firms with active business operations, not just incorporation, in tax haven countries.
Firms with active operations in tax havens, especially purchasing inputs from related parties there, have significantly lower effective tax rates, paying millions less in taxes annually.
The tax-reducing effect of active haven operations is triple that of just having a tax haven subsidiary. Asset ownership in havens enables even more profit shifting.
New methods can predict tax haven operations for firms that strategically don’t disclose them, providing valuable information to regulators and investors about companies’ tax avoidance.

We use machine learning to show that Hoberg and Moon’s offshore activities data in 177 foreign countries contain useful information to predict firms’ use of active tax havens--even when firms’ Exhibit 21 information is not available or does not disclose a tax haven subsidiary.

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