Saturday, May 23, 2015

Financial Derivatives in Corporate Tax Avoidance: A Conceptual Perspective

ABSTRACT

Financial derivatives play an increasingly common role in corporate tax avoidance. This paper takes a descriptive approach to answer the fundamental, yet underexplored, questions of why derivatives are useful for corporate tax avoidance and how they fulfill this objective. To evaluate why, I develop and discuss a simple framework of research, practical issues, and anecdotes about derivatives-based tax avoidance. I then provide unique insight into how derivatives reduce taxes by discussing the complex transaction-level detail of two derivatives-based tax-planning strategies. Finally, I identify potential issues that might be addressed in future research. Overall, by discussing the concepts and mechanics of derivatives-based tax avoidance, this study serves as a prologue to extant and future research on the topic.

Keywords:  financial instruments, derivatives, tax avoidance, tax shelter

Article Citation:
Michael P. Donohoe (2015) Financial Derivatives in Corporate Tax Avoidance: A Conceptual Perspective. The Journal of the American Taxation Association: Spring 2015, Vol. 37, No. 1, pp. 37-68.

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