Profitability and Tax Avoidance

Sammanfattning: We ask whether tax savings generated by tax avoidance activities outweigh the associated agency costs. Using a decrease in tax avoidance following the adoption of IFRS, we find that tax aggressive firms' future operating profitability improved by 3.2 percent in our cross-country sample. This increase is driven by improved asset utilisation and operating liability management. Our results suggest that tax avoidance has a negative impact on operating profitability. These findings imply that tax authorities and outside shareholders share a common goal: decreasing managerial rent extraction.