Do Tax Deductions for Goodwill Impairments Affect Financial Reporting?

• In Event: Tax Reporting

Abstract

We investigate whether special tax deductions for goodwill impairments influence financial accounting decisions. Unlike most countries, Luxembourg allows tax deductions for goodwill impairments without the need to dispose of any assets. We predict and find that multinational firms with subsidiaries in Luxembourg are more likely to write-down goodwill than multinational firms without subsidiaries in Luxembourg. While multinational firms with Luxembourg subsidiaries are more likely to write-down goodwill and write down larger amounts of goodwill on average, we find that conditional on recording a goodwill impairment, the amount of each goodwill write-down does not differ between multinational firms with and without Luxembourg subsidiaries. We contribute to the literature on the interaction between book and tax reporting, the determinants of goodwill impairments, and the effects of book-tax conformity. This is one of the few studies that looks at the mechanisms through which firms avoid tax, in particular, examining a previously unexplored aspect of tax haven usage.

Authors

• Sarah Blechinger, University of Connecticut

• Steve Utke, University of Connecticut