Corporate In-house Tax Departments*

Xia Chen*, Qiang Cheng, Travis Chow, Yanju LIU

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

In-house human capital tax investment is a significant input to a firm's tax decisions. Yet, due to the lack of data on corporate in-house tax departments, there is little empirical evidence on how tax departments are associated with tax planning and compliance outcomes. We expect the size of tax departments to be positively associated with the effectiveness of tax planning and compliance. Using hand-collected data on the number of corporate tax employees in S&P 1500 firms over the 2009–2014 period, we find that firms with larger tax departments are associated with lower and less volatile cash effective tax rates. Furthermore, using tax employees' specialization, we identify tax departments' relative focus on planning or compliance and document a trade-off between tax avoidance and tax risk. Specifically, tax departments with more of a tax planning focus have incrementally greater tax avoidance but higher tax risk, whereas tax departments with more of a tax compliance focus have incrementally lower tax risk but higher tax rates. Overall, this paper contributes to the literature by looking inside the “black box” of corporate tax departments and shedding light on the importance of human capital tax investment for tax outcomes.

Original languageEnglish
Pages (from-to)443-482
Number of pages40
JournalContemporary Accounting Research
Volume38
Issue number1
DOIs
Publication statusPublished - 1 Mar 2021

Scopus Subject Areas

  • Accounting
  • Finance
  • Economics and Econometrics

User-Defined Keywords

  • tax avoidance
  • tax compliance
  • tax department
  • tax planning
  • tax risk

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