Tax Aggressiveness Essay

Tax aggressive behavior can b e broken down into two main areas: 1) Reducing a company’s effective tax rate; and 2) Increasing the amount Of armament differences between financial reported income and taxable income e that is reported to the government. The benefit of tax aggressive behavior is ultimately to reduce a company’s tax liability. There are however many possible costs associated with this type of behavior t hat management must consider before acting. By engaging in tax aggressiveness a company ex poses themselves to the potential threat of penalties from governing tax bodies for noncompliance once to regulations (egg.

IRS). The firm may also face both reputation and political costs by being labeled as a poor corporate citizen” (Hanson & Sellers 2009). Tax aggressive behavior is t happily viewed in a negative manner by the public. It is thought that news of these tactics firs t makes the public and their suppliers question whether the firm is dealing aggressively with all o f their interactions. This in turn could result in those individuals becoming hesitant to continue De ailing with the firm (Klein & Leveler, 1981).

It also brings into question the possibility of undetected d tax aggressive behavior, that if brought to light could result in prosecution and other ASCII Ted costs (Ideas & Thermal, 2009). Lastly if a firm is caught engaging in these tactics this cool d lead too perception of management incompetence, “assuming that smart managers w oldest get caught” (Busch & Cared, 1991). Ideas and Thermal found in their study (2006), the at only firms with good corporate governance were able to actually increase firm value through tax aggressive behavior.

With all of the negative effects that tax aggressive behavior is associated with it would seem logical that inversion would have negative implications towards a firm, a s inversion is ultimately a form of tax aggressive behavior. There is also an inherent agency cost due to the fact that management is responsible for decisions relating to both capital structure e and tax aggressive strategies. Both may be implemented simultaneously, thus resulting in a engage dive relationship between the two (Clan, Kale, & Engagement, 2013).

Since there have been a eve ray limited amount of corporate inversions to date the studies that have been conducted have be en able to closely examine the effects of inversion and so far the opposite has been documented d. Stock prices are observed to react in a positive way, typically prices appreciate 1. 7% (on average) over a vivified window centered on the actual inversion announcement NT (Ideas & Hines, 2002). It was also documented that the stock price appreciation was consider ably higher for firms that had experienced appreciated firm values in the previous year, as w ell as in firms that are heavily levered.