William O’Brien on the Use and Abuse of Tax Havens
William O'Brien on the Use and Abuse of Tax Havens Heading link
Under what circumstances do firms return money to shareholders, and by what means? , “In the past,” says UIC Business Assistant Professor William O’Brien, “firms could avoid taxes on overseas sales by using profits to repurchase shares through foreign subsidiaries.”
The practice was common until 2007, when IBM was a little too public about saving $1.6 billion through tax-havens. After the IRS closed the loophole, tax-avoiding firms had to pay taxes on overseas earnings or issue new domestic debt to fund repurchases.
“Share repurchases became more costly, which means they can tell us more about the firm. This goes back to what’s called ‘signaling theory’ in finance. Basically, repurchases have to be costly to yield any information.”
When asked about his research interest, O’Brien admits that he’s drawn to corporate practices that are considered controversial. “The use of tax havens, the formation of ‘business groups’ across different firms, heavily-debated executive compensation practices – I’m interested in finding out why firms do these things, how has regulation affected these practices, and what affect do these practices have on other firm decisions and outcomes.”
O’Brien’s goal as an educator is to help students work through the jargon to get a clear picture of what’s going on. “Finance terminology can be strange and confusing,” he says, “but the underlying concepts are very intuitive when broken down.”
UIC Business students will have the opportunity to see corporate practice through O’Brien’s research and teaching as he moves forward. “Some firms are avoiding taxes by structuring U.S. mergers and acquisitions to look like corporate reorganizations, using techniques with names like ‘the killer B,’ ‘the deadly D’ and ‘the outbound F’. We’ve only scratched the surface of examining the links between the use of overseas tax havens and the impact of this practice on corporate financial decisions.”