Corporate In-house Tax Departments

Abstract

In-house tax investment is a significant input to a firm’s tax decisions. Yet, due to the lack of data, there is little empirical evidence on how corporate tax departments are associated with tax planning and compliance outcomes. Using hand-collected data on corporate tax employees in S&P1500 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: tax departments with a more tax planning focus have incrementally greater tax avoidance but higher tax risk, and tax departments with a more 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.

Keywords: Human Capital, Tax Planning, Tax Avoidance, Tax Risk

JEL Classification: J24, H25, H26