2024 journal article

"Just BEAT it" do firms reclassify costs to avoid the base erosion and anti-abuse tax (BEAT) of the TCJA?

JOURNAL OF ACCOUNTING & ECONOMICS, 77(2-3).

By: S. Kelley*, C. Lewellen n, D. Lynch * & D. Samuel *

author keywords: Tax reform; International tax; Tax reserves; Internal information quality; TCJA; BEAT
UN Sustainable Development Goal Categories
1. No Poverty (Web of Science)
10. Reduced Inequalities (Web of Science)
Source: Web Of Science
Added: June 24, 2024

This study empirically examines whether firms reclassify related-party payments to avoid the base erosion and anti-abuse tax (BEAT) of the Tax Cuts and Jobs Act (TCJA). We leverage the BEAT filing threshold and use both a difference-in-differences design among U.S. firms and a triple-difference design utilizing the parent company's location to provide evidence that firms reclassify related-party payments to avoid the BEAT. This effect is stronger in firms with greater pre-TCJA income shifting incentives. We estimate a $6 billion aggregate reduction in U.S. taxes for our sample firms in 2018. We also examine the consequences of reclassifying related-party payments and find some evidence of an increase in tax reserves and a reduction in internal information quality for firms that engage in cost reclassification to avoid the BEAT. These findings help explain observed BEAT collection shortfalls, contribute to the current policy debate about international tax reform, and document spillover effects of tax policy.