FIN 48 and the tax aggressive behaviors of transnational corporations: A decade later

Transnational corporations (TNCs) adopt tax behaviors to minimize global tax footprints while maximizing after-tax profits and shareholder value. However, associated costs to the TNC include; higher audit probabilities, potential interest/penalties, and tax court litigation. Costs also accrue to tax authorities (increased audits and lost tax revenues), and the US Securities and Exchange Commission (increased regulatory expenses). Since Financial Accounting Standards Board (FASB) Interpretation Accounting for Uncertainty in Income Taxes (FIN 48) was implemented in 2007, research has assessed its impact on global earnings management and reporting quality with little consensus across studies. Prior studies document tax avoidance measured by declining effective tax rates, but do not cover recent years or potentially informative tax and other metrics. This study documents a pattern of TNC global tax avoidance and aggressiveness during the first decade of FIN 48. We assessed tax metrics not included in prior studies, including offshore profits, intangible and research and development intensities, and tax havens, and posited potential explanations for observed tax behaviors. Data suggest that TNC tax-avoidance behaviors increased in the decade following FIN 48, with steady increases in unrecognized tax benefits, unrepatriated earnings, and specific tax metrics, contrary to FASB’s assertion that FIN 48 would decrease them.