Tax Shelters, Tax Havens and Permanently Reinvested Earnings

Abstract

We examine the relationship between corporate subsidiaries located in tax haven countries, the parent firms’ tax sheltering activity, and permanently reinvested earnings. We measure tax shelter intensity with tax reserves established under ACS 740-10 for uncertain tax positions that are unlikely to be upheld upon audit. In the sample of 768 Fortune 1000 firms, each firm has, on average, 84 subsidiaries in 19 locations, with 8 subsidiaries in tax haven countries. Firms with larger amounts of permanently reinvested earnings show greater tax shelter intensity; for every $1 billion in permanently reinvested earnings, firms increase tax reserves for uncertain positions by $20.6 million. After controlling for the level of permanently reinvested earnings, we find that firms’ tax shelter intensity increases with the number of tax haven jurisdictions in which they establish subsidiaries. In additional analysis controlling for industry, foreign operations and tax burden, we find tax shelter intensity increases for firms having subsidiaries located in four tax havens: British Virgin Islands, Hong Kong, Malta and Singapore.