The Economic Effects of Special Purpose Entities on Corporate Tax Avoidance

Abstract

This study estimates the corporate tax savings facilitated by special purpose entities (SPEs). From 1997 to 2013, we find that firms using SPEs have lower book and cash effective tax rates (ETRs) than non-users. We also find that more extensive use of SPEs is related to reductions in both book and cash ETRs, and estimate the annual cash tax savings for the average SPE user at $10.5 million. These results equate to aggregate cash tax savings between $111 billion and $223 billion for the entire sample of SPE users, or 2.5% to 5.0% of U.S. corporate income tax collections. Finally, we find evidence that SPEs facilitate tax savings by increasing (1) debt capacity, (2) financing for R&D, (3) income shifting across jurisdictions with intangibles, (4) tax credit and loss duplication, and (5) repatriation tax deferrals. Collectively, these findings provide economic insight into the magnitude and mechanisms of SPE-based corporate tax avoidance.