Assessing the Role of Unrecognized Tax Benefits as a Proxy for Tax Avoidance

• Název práce v češtině: Zkoumání role nevyužitých daňových odpočtů jako nástroje pro odhad daňových úniků
• Název v anglickém jazyce: Assessing the Role of Unrecognized Tax Benefits as a Proxy for Tax Avoidance
• Klíčová slova: Nevyužité daňové odpočty, Daňová optimalizace, Daňová reforma TCJA, Kvantilová regrese, Difference-in-differences
• Klíčová slova anglicky: Unrecognized Tax Benefits, Tax Avoidance, TCJA, Quantile Regression, Difference-in-Differences
• Akademický rok vypsání: 2023/2024
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: PhDr. Miroslav Palanský, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 30.05.2024
• Datum zadání: 30.05.2024
• Datum a čas obhajoby: 18.06.2025 00:00
• Místo konání obhajoby: IES
• Datum odevzdání elektronické podoby: 28.04.2025
• Oponenti: prof. Ing. Karel Janda, Dr., Ph.D., M.A.

Seznam odborné literatury

Cazier, R., Rego, S., Tian, X., & Wilson, R. (2009). Early evidence on the determinants of unrecognized tax benefits: Working paper. Texas Christian University, Indiana University, Ohio State University, and University of Oregon.
De Simone, L., Nickerson, J., Seidman, J. and Stomberg, B. (2020). ‘How reliably do empirical tests identify tax avoidance?’ Contemporary Accounting Research, 37(3)
Drake, K. D., Hamilton, R. and Lusch, S. J. (2020). ‘Are declining effective tax rates indicative of tax avoidance? Insight from effective tax rate reconciliations’. Journal of Accounting and Economics, 70(1)
Dyreng, S. D., Hanlon, M. and Maydew, E. L. (2019). ‘When does tax avoidance result in tax uncertainty?’ The Accounting Review, 94(2)
Gross, A. D. (2023). ‘Does mandatory disclosure affect recognition of contingent liabilities? Evidence from FIN 48’. Journal of Corporate Accounting & Finance, 34(1)

Předběžná náplň práce v anglickém jazyce

Motivation:
In June 2006, the Financial Accounting Standards Board (FASB) released Interpretation No. 48 (FIN 48), titled “Accounting for Uncertainty in Income Taxes,” to clarify the accounting for uncertain tax positions. Effective for fiscal years beginning after December 2006, FIN 48 requires firms to disclose a liability for unrecognized tax benefits (UTBs), which represent a reserve that firms establish in their financial statements for tax savings generated in the current period that could be denied upon challenge by tax authorities. This standard mandates that companies assess whether a tax position is “more likely than not” to be sustained when examined by a tax authority, and if not, record the associated amount as a contingent liability in the UTB reserve. Prior to FIN 48, there were no standardized rules governing the accounting for uncertain tax positions.

Previous literature has established a clear connection between tax avoidance and an increase in tax uncertainty. Cazier et al. (2009) identified a relationship between the level of UTBs at fiscal year-end, changes in liabilities for current tax positions, and firm characteristics associated with tax avoidance. Additionally, there is a noteworthy negative correlation between firms’ cash effective tax rates and the ending balance of UTBs. Most notably, Dyreng et al. (2019) found that tax avoiders, on average, increased their UTBs by over 50% more than non-avoiders over a five-year period.

Enacted in 2017, the Tax Cuts and Jobs Act (TCJA) introduced several significant changes to the U.S. tax code that are relevant to the study of tax avoidance and tax uncertainty. Particularly, it has reduced the corporate tax rate from 35% to 21%. This substantial decrease in the statutory tax rate may have influenced firms' tax avoidance strategies, as the incentive to engage in aggressive tax avoidance could diminish when the tax rate is lower.

My thesis aims to empirically examine the impact of the TCJA on the behavior of tax-avoiding firms, specifically through changes in their UTB reserves. This research seeks to determine whether UTBs can reliably serve as a proxy for tax avoidance. A decrease in UTB reserves following the reform would likely indicate profit shifting to other jurisdictions. Conversely, if UTB reserves remain unchanged, it may suggest that the observed behaviors are due to genuine uncertainty stemming from legal or factual ambiguities, rather than intentional tax avoidance.

Hypotheses:
• H1: The TCJA has led to a significant decrease in UTB reserves among tax-avoiding firms. Rationale: If firms are shifting profits to lower-tax jurisdictions due to the TCJA's changes, we would
expect to see a reduction in their UTB reserves as they engage in less aggressive tax avoidance.
• H2: The relationship between UTB reserves and tax avoidance behavior is stronger for firms with higher number of tax haven subsidiaries post-TCJA.
Rationale: Firms with a higher number of tax haven subsidiaries will exhibit a stronger relationship due to the increased complexity, risk, and scrutiny associated with aggressive tax strategies in the post- TCJA regulatory environment.

Methodology:
I will identify a sample of publicly traded U.S. companies that have reported UTB reserves and have been active in tax avoidance strategies. I will collect firm data before and after the implementation of the TCJA, focusing on years immediately preceding and following the TCJA's enactment (e.g., 2015-2022). Financial data and SEC fillings data will be sourced from S&P Capital IQ, while informartion on number of tax haven subsidiaries will be obtained from the Orbis database.
The primary dependent variable in my analysis will be the change in UTB reserves. For H1, I intend to create a binary variable indicating whether a firm is classified as a tax-avoiding firm based on its effective tax rate. For H2, I will create an interaction term between variable measuring the number of tax haven subsidiaries for each firm and tax avoidance measure.
To ensure the robustness of my findings, I will include control variables such as firm size, leverage, industry classification, and other relevant financial metrics to account for potential confounding factors.

Expected contribution:
By exploring the relationship between UTB reserves and tax avoidance post-TCJA, my research will bring new insights into how international tax strategies influence tax uncertainty. This fills a gap in the literature regarding the implications of the TCJA on corporate tax behavior. Next, it could lead to more informed discussions about tax reform and compliance measures by bringing new insights on the use of tax havens and the associated risks of tax avoidance strategies.