Tax Planning through Advanced Tax Rulings – An Exploratory Analysis Using the Luxembourg Tax Leaks

Abstract

We make use of details of advanced tax rulings (ATRs) provided by the Luxembourg Tax Inspector to multinational firms and examine how the types and attributes of ATRs affect tax planning outcomes. We find that ATR firms realize lower GAAP ETRs than control firms. Tax savings achieved by ATR firms are associated with hybrid arrangements, the avoidance of non-income taxes, and the overall complexity of the rulings. While on average, ATRs do not appear to be associated with uncertain tax benefits, the use of more hybrid arrangements and/or exceedingly complex ATRs is associated with higher uncertainty. This suggests that while ATRs provide a degree of certainty in Luxembourg, they may lead to higher uncertainty in other taxing jurisdictions. We contribute to the literature on tax planning of multinationals by providing a unique look into the details of transactions that facilitate tax avoidance. Our paper can provide tax authorities with insight into transactions used by multinationals to move income within organizations.