Tax Aggressiveness

Tax Aggressiveness
“Over and over again courts have said that there is nothing sinister in arranging one’s affairs so as to keep taxes as low as possible. Everybody does so, rich or poor, and all do right, for nobody owes any public duty to pay more taxes than the law demands. Taxes are enforced exactions, not voluntary contributions.” (Hand, 1947). It is this view­point that spurs management towards tax aggressive behavior. Tax aggressive behavior can be broken down into two main areas: 1) Reducing a company 's effective tax rate; and 2) Increasing the amount of permanent differences between financial reported income and taxable income that is reported to the government.
The benefit of tax aggressive behavior is ultimately to reduce a company’s tax liability.
There are however many possible costs associated with this type of behavior that management must consider before acting. By engaging in tax aggressiveness a company exposes themselves to the potential threat of penalties from governing tax bodies for non­compliance to regulations
(eg. IRS). The firm may also face both reputational and political costs by being labeled as a
“poor corporate citizen” (Hanlon & Slemrod 2009). Tax aggressive behavior is typically viewed in a negative manner by the public. It is thought that news of these tactics first makes the public and their suppliers question whether the firm is dealing aggressively with all of their interactions.
This in turn could result in those individuals becoming hesitant to continue dealing with the firm
(Klein & Leffler, 1981). It also brings into question the possibility of undetected tax aggressive behavior, that if brought to light could result in prosecution and other associated costs (Desai &
Dharmapala, 2009). Lastly if a firm is caught engaging in these tactics this could lead to a perception of management incompetence, “assuming that smart managers wouldn’t get caught”

(Bosch & Eckard, 1991). Desai and Dharmapala found in their study (2006), that only firms with good corporate governance were able to actually increase firm value through tax aggressive behavior. With all of the negative effects that tax aggressive behavior is associated with it would seem logical that inversion would have negative implications towards a firm, as inversion is ultimately a form of tax aggressive behavior. There is also an inherent agency cost due to the fact that management is responsible for decisions relating to both capital structure and tax aggressive strategies. Both may be implemented simultaneously, thus resulting in a negative relationship between the two (Jalan, Kale, & Meneghetti, 2013). Since there have been a very limited amount of corporate inversions to date the studies that have been conducted have been able to closely examine the effects of inversion and so far the opposite has been documented.
Stock prices are observed to react in a positive way, typically prices appreciate 1.7% (on average) over a five­day window centred on the actual inversion announcement (Desai & Hines,
2002). It was also documented that the stock price appreciation was considerably higher for firms that had experienced appreciated firm values in the previous year, as well as in firms that are heavily levered. The first scenario resulting in shareholder’s experiencing high capital gains liabilities that would be triggered upon a corporate inversion; For the highly levered firm, this was believed to be due to the loss of their ability to claim foreign tax credits they would need if they were a U.S. company (Desai & Hines, 2002).
Aggressive tax sheltering in the presence of a high level of debt significantly increases the likelihood that the firm will have a going concern issue (Jalan, Kale, & Meneghetti, 2013).On
April 20, 2005 the U.S. passed the Bankruptcy Abuse Prevention and Consumer Protection Act

(BAPCPA). This law has increased the amount of power that a creditor has due to the higher level of scrutiny that a company will face if they file for bankruptcy. This law has helped to dissuade management from tax aggressive behavior (Jalan, Kale, & Meneghetti, 2013).
Ultimately management must heavily weigh the benefits with the many costs associated with a tax aggressive strategy. With increased regulation, threat of consumer backlash and costs to the manager personally, there is not a flood of companies headed towards inversion as of yet. References
Desai, M. A., & Hines Jr., J. R. (2002). Expectations and Expatriations: Tracing the Causes and
Consequences of Corporate Inversions. National Tax Journal, 55(3), 409­440. Hanlon, M., & Slemrod, J. (2009). What does tax aggressiveness signal? Evidence from stock price reactions to news about tax shelter involvement. Journal Of Public Economics, 93(1/2),
126­141. doi:10.1016/j.jpubeco.2008.09.004 Desai, M. A., & Dharmapala, D. (2006). Corporate tax avoidance and high­powered incentives.
Journal Of Financial Economics,79145­179. doi:10.1016/j.jfineco.2005.02.002 Desai, M. A., & Dharmapala, D. (2009). Corporate tax avoidance and firm value. Review Of
Economics And Statistics, (3), 537. Bosch, J., & Eckard, ,. W. (1991). The Profitability of Price Fixing: Evidence From Stock
Market Reaction to Federal Indictments. The Review of Economics and Statistics, (2). 309.

A. Jalan, Kale J. R., & Meneghetti C. 2013 Corporate Tax Aggressiveness and the Role of Debt.
Google Scholar, efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2014­Rome/papers/E FMA2014_0396_fullpaper.pdf

References: Desai, M. A., & Hines Jr., J. R. (2002). Expectations and Expatriations: Tracing the Causes and  Consequences of Corporate Inversions. National Tax Journal, 55(3), 409­440.    Hanlon, M., & Slemrod, J. (2009). What does tax aggressiveness signal? Evidence from stock    Desai, M. A., & Dharmapala, D. (2006). Corporate tax avoidance and high­powered incentives.  Desai, M. A., & Dharmapala, D. (2009). Corporate tax avoidance and firm value. Review Of  Economics And Statistics, (3), 537.    Bosch, J., & Eckard, ,. W. (1991). The Profitability of Price Fixing: Evidence From Stock  A. Jalan, Kale J. R., & Meneghetti C. 2013 Corporate Tax Aggressiveness and the Role of Debt.  Google Scholar,