Accounting Webinar (2020-08)

Topic:“Just BEAT It” Do Firms Reclassify Costs to Avoid the Base Erosion and Anti-abuse Tax (BEAT) of the TCJA?

Speaker: Stacie K. Laplante, University of Wisconsin-Madison

Time: Thursday, June 11^th, 10:00-11:30 a.m

Place: Microsoft Teams

Abstract:

This study examines whether firms reclassify related-party payments to avoid the new base erosion and anti-abuse tax (BEAT). The Tax Cuts & Jobs Act of 2017 included the BEAT to combat earnings stripping via inter-company payments from U.S. to foreign multinational corporations (MNC). To compute the BEAT, firms must add-back certain types of inter-company payments to their tax base. However, intercompany payments subject to BEAT exclude cost of goods sold. This exclusion provides firms an incentive to reclassify inter-company payments, such as royalties, as cost of goods sold, leading to an increase in revenue reported by foreign subsidiaries. Using a triple difference-in-difference design that leverages the BEAT filing threshold of $500 million in revenue and the location of the parent company (U.S. versus Non-U.S.), we compare the unconsolidated revenues of foreign subsidiaries of MNCs subject to BEAT (treatment firms) to those of foreign subsidiaries of MNCs not subject to BEAT (control firms). We find treatment firms subject to BEAT exhibit higher revenue growth by four percentage points relative to control firms. We find similar results in the subsample of U.S. MNCs above versus below the BEAT filing threshold. Finally, we find this effect is strongest in tax haven subsidiaries, suggesting that MNCs reclassify costs for subsidiaries that likely received higher related-party payments classified as royalties. Overall, our results imply that firms use the subjectivity inherent in cost classification to reclassify costs as cost of goods sold to avoid the BEAT.

Introduction:

Stacie Laplante received her Ph.D. from University of Washington in Seattle, has previously taught at Terry College of Business at the University of Georgia, and has nine years of experience in public accounting industry as a certified public accountant. Laplante’s research focuses on the intersection of financial and tax reporting. She is particularly interested in information related to tax reporting that is reflected in firms’ publicly available financial statements and what the information reveals about the firm’s tax-planning strategies, as well as how the market uses or values that information.

//wsb.wisc.edu/directory/faculty/stacie-laplante

Your participation is warmly welcomed!