What a Director's Tax-Haven Ties Do to Corporate Taxes
Add a director connected to the Bahamas, Bermuda, or the Caymans, and the firm's tax bill tends to fall.
Directors carry expertise from boardroom to boardroom. This research asks whether a very specific kind of expertise, familiarity with offshore tax havens, travels with them.
Using a novel identification strategy to separate connection effects from the possibility that similar firms simply pick similar people, the study finds that U.S. firms with directors connected to firms domiciled in well-known island havens, the Bahamas, Bermuda, and the Cayman Islands, engage in significantly greater tax avoidance than otherwise similar firms.
The magnitudes are material. The presence or arrival of an island-connected director is associated with a reduction of one to three percentage points in the firm's effective tax rate, and the firm's use of tax haven subsidiaries rises after the director arrives.
Boards import more than judgment; they import playbooks. For investors and tax authorities, a firm's director network is a signal about the tax policy likely to follow.
The Takeaway
Offshore know-how moves through the director network. Island-haven connections predict lower effective tax rates and more haven subsidiaries.