Handbook of Empirical Corporate Finance

8. Tax shelters

Tax shelters offer a means of reducing taxes that may displace traditional sources of corporate tax deductions. Three common characteristics of shelters are that they reduce tax liability without greatly altering financial statement information, they are shrouded in secrecy, and they are often shut down once detected by the Treasury. Tax shelters can take many different forms, and the current “hot product” is always evolving. They usually exploit glitches in the tax system such as asymmetric domestic and foreign tax treatment or a situation in which income is allocated beyond economic income. In the short-run, before detection, shelters can create a money pump for some firms, with benefits far exceeding transactions costs and ...