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|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|5288||2013||22 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Financial Economics, Volume 108, Issue 3, June 2013, Pages 751–772
We examine whether Delaware is a domestic tax haven. We find that taxes play an economically important role in determining whether U.S. firms locate subsidiaries in Delaware and that a Delaware-based state tax avoidance strategy lowers state effective tax rates by between 0.7 and 1.1 percentage points, on average. The tax savings represent a 15–24% decrease in the state income tax burden and translate to an increase in net income of 1.04–1.47%. However, we find that the tax benefits of Delaware tax strategies are diminishing over time in response to initiatives by state governments to limit multistate tax avoidance.
The role of tax havens in corporate tax avoidance has been studied extensively in recent academic work (e.g., Dyreng and Lindsey, 2009 and Markle and Shackelford, 2012). These studies focus on foreign tax havens used by corporations in the U.S. to reduce income taxes. In aggregate, U.S. firms save billions of dollars in tax liabilities using foreign tax havens. However, opportunities to avoid corporate tax are not restricted to foreign tax havens, such as the Cayman Islands or Bermuda. Substantial tax rate variation exists among U.S. states, suggesting that U.S. corporations operating in multiple states can exploit similar tax avoidance opportunities domestically. Foremost among U.S. states with a corporate tax code conducive to tax-motivated income shifting is Delaware. Recently, Delaware has become a target of scrutiny in the popular press and on the world stage. Articles in The New York Times and The Economist have gone so far as to suggest that Delaware is a domestic tax haven.1 In June 2010, Delaware landed at the top of National Geographic magazine's published list of the most secretive tax havens in the world, outpacing more commonly mentioned foreign tax havens such as Luxembourg, Switzerland, and the Cayman Islands.2 Foreign nations have also voiced concerns about Delaware's exploits as a tax haven. Recently, the government of Brazil considered legislation to officially blacklist Delaware as an abusive tax haven, right alongside other countries perceived to be tax havens, such as Bermuda and the Isle of Man, among others.3 In spite of the increased public allegations regarding Delaware's role as a tax haven, surprisingly little academic research has been conducted to evaluate these claims. To examine these claims, we first review the fundamentals of state income tax laws in the U.S. and describe a Delaware-based tax strategy that involves shifting income between subsidiaries of the same firm. Second, we address a number of empirical questions that will help researchers, practitioners, and policy makers better understand whether Delaware is indeed a domestic tax haven. Does Delaware's well-known dominance in parent company incorporation hold for subsidiary incorporations? Do firms organize subsidiaries in Delaware solely to take advantage of legal and governance benefits (as has been argued to be the case for parent corporations), or do tax avoidance strategies also play a role? If taxes play a role, how substantial are the tax benefits? We provide answers to these questions in the analyses that follow. Prior research has shown that Delaware dominates other states in the “market for incorporation” of parent companies. For example, Bebchuk and Cohen (2003) show that nearly 60% of parent firms are incorporated in Delaware and argue that the drivers of Delaware's preeminence are the significant legal and governance benefits available to firms incorporated there. We find that approximately 58% of domestic subsidiaries in our sample are incorporated in Delaware, a pattern that is similar to that observed in parent companies. While at first glance this result may not seem surprising, consider that subsidiaries do not face the same legal and governance challenges, such as hostile takeovers and disclosure rules, as parent companies face. Thus, legal and governance factors may receive less weight in making subsidiary incorporation decisions, which suggests that other factors, including taxes, also play a role. Our tests reveal that the frequency of subsidiaries located in Delaware far outpaces its economic output as measured by Gross Domestic Product (GDP), which suggests that Delaware subsidiaries are organized for purposes beyond satisfying local demand to produce goods and services. In addition, we show that the frequency of patent assignment to Delaware-based owners per dollar of state GDP is the highest in the country. Placing intangible assets, such as patents or trademarks, in Delaware creates opportunities for within-firm income shifting that ultimately reduce the firm's tax burden. We find that a firm's decision to locate a subsidiary in Delaware is significantly influenced by tax factors. Sample firms are more likely to locate subsidiaries in Delaware if they both own intangible assets and operate in states that have tax laws conducive to cross-state income shifting strategies. These strategies often involve a Delaware subsidiary in conjunction with operations in states that allow separate filing or lack an economic nexus doctrine.4 In addition, the likelihood of operating a subsidiary in Delaware is increasing in the average statutory tax rate faced by all the firm's subsidiaries and is increasing in the propensity to operate in foreign tax havens. In terms of economic significance, these tax factors are at least as influential (if not more so) in the subsidiary incorporation decision as factors that have been shown in prior research to affect Delaware parent incorporation. Next, we show that Delaware subsidiaries play a significant role in corporate state tax avoidance. Firms likely to be using Delaware-based state tax avoidance strategies have state effective tax rates (State ETRs) between 0.7 and 1.1 percentage points lower than other firms, on average. The reduction in State ETRs translates into a decrease in state income tax payments of 15–24%. In aggregate, we estimate a range of total state tax savings of $6.6–$9.5 billion over the sample period, depending upon our model specification.5 However, some firms realized far greater tax savings by aggressively pursuing the Delaware-based state tax avoidance strategy (see Section 5 and the online supplement). Reductions in State ETRs also have a direct impact on a firm's accounting earnings. In our sample, the mean (median) firm likely to have a Delaware-based strategy in place could expect to see an increase in net income of between 1.05% and 1.49% (1.07% and 1.52%).6 Reducing tax payments may also increase shareholder value. Using several different methods, we estimate that the positive effect on equity market value attributable to the tax savings is between 1.1% and 1.9% for the typical firm likely to use a Delaware-based state tax avoidance strategy.7 The state tax landscape has changed significantly over the sample period as many states have launched legislative or administrative initiatives to mitigate Delaware-type state tax planning strategies. Our findings suggest that in aggregate these strategies, such as requiring combined reporting and invoking economic nexus doctrines, have been somewhat effective: firms continue to generate tax savings by locating subsidiaries in Delaware, but the magnitude of the savings has diminished by 25% to 41% in the second half of the sample period compared to the first half of the sample period. Our findings are relevant to policy makers who are facing shrinking corporate tax revenues, which accounted for 10.2% of total state tax revenues in 1979, but accounted for only 5.4% of total state tax revenues in 2010 (Census, 2011). Politicians are currently exerting significant pressure on foreign tax havens to lift secrecy laws that enable U.S. citizens and enterprises to shift income and hide assets.8 Our results are relevant to state politicians who may be considering similar actions to mitigate multistate tax avoidance strategies and suggest that requiring combined reporting and/or invoking economic nexus doctrines has to some degree decreased the level of tax avoidance for our sample firms. Our research is also informative to the ongoing debate in the European Union surrounding business taxation in member countries (e.g., Gresik, 2010, Hines, 2010 and Runkel and Schjelderup, 2011). The European Commission (2001) has explicitly proposed that the EU adopt a formula apportionment system (similar to that used by states in the U.S.) and move away from the standard separate accounting system. We find that significant opportunities for tax avoidance exist in formula apportionment systems when tax laws, tax rates, and/or apportionment formulas vary among taxing regimes. These opportunities are actively exploited by some firms in our sample. Our study also augments prior research that establishes the major role Delaware plays in the decision of where to incorporate (e.g., Daines, 2001 and Subramanian, 2004). Prior research investigates only the decision of where to incorporate the parent company of the firm. In contrast, we use a new data set that allows us to examine the determinants of where to incorporate subsidiaries of the firm. Understanding the determinants of the location decisions for the entire corporate family and not just those for the parent corporation is important for at least two reasons. First, as U.S. companies expand the scale of their operations with multiple subsidiaries across various states and countries, the relative importance of both the parent company headquarters and state of incorporation locations diminishes, while the importance of its subsidiary locations increases (Desai, 2009). Second, what matters most to the parent company is not necessarily what matters most to its subsidiaries. Our results suggest that for subsidiaries, the tax benefits of incorporating in Delaware are incremental to the factors used in prior research to explain parent incorporation in Delaware. This idea has been overlooked in prior research.
نتیجه گیری انگلیسی
In this study, we explore the role of Delaware as a domestic tax haven. We extend the finance and legal literatures that examine why parent firms incorporate in the state of Delaware by showing that the decision to incorporate subsidiaries in Delaware is partially driven by corporate state income tax considerations. This finding stands in contrast with those of prior research, which show that legal and governance benefits drive the market for parent incorporation location. After establishing that taxes are a factor in determining where firms locate their subsidiary operations, we quantify the effect on state effective tax rates of operating subsidiaries in Delaware. We show that firms most likely to have a Delaware-based tax strategy in place are able to reduce their state income tax burden between 15% and 24% when compared to other firms. Our results show that the state of Delaware is indeed a domestic tax haven in the sense that its corporate laws appear to enable firms to significantly reduce state income tax burdens. This reduction comes at the expense of other states and benefits Delaware via franchise taxes and fees. However, we urge caution in assigning blame solely to Delaware for its tax policies—the Delaware tax strategies discussed in this paper are effective only because of the tax policies in other states. Our findings suggest that other states may be able to mitigate lost state tax revenues attributable to Delaware-based state tax avoidance strategies by requiring combined reporting or adopting an economic nexus doctrine for state income tax nexus. Specifically, we find that firms' state tax savings related to Delaware-based state tax avoidance strategies are diminishing over time as states counteract these strategies by requiring combined reporting or invoking an economic nexus doctrine.