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Poole Business
Summer 2018 Tax Havens: Bad Practice, or Good Business?
Christina Lewellen

Tax Havens: Bad Practice, or Good Business?

For most of us, “tax avoidance” means procrastinating before the April 15th IRS deadline.

For Christina Lewellen, the term has an entirely different meaning.

An assistant professor of accounting at the NC State Poole College of Management, Lewellen specializes in the type of tax avoidance that enables businesses to pay the least amount of tax they legally owe.

In research soon to be published in Contemporary Accounting Research, Lewellen examines the effects of the much-maligned practice of firms incorporating in tax-haven countries while operating elsewhere.

“You can avoid tax in legal ways,” Lewellen said. “The tax law has a lot of subjectivity in it. If you plan your affairs effectively, you can pay lower taxes in a legal way.”

Top 20 Master of Accounting Program

—Public Accounting Report 2017

Lewellen was in private practice for five years after completing her master’s of accounting degree at East Carolina University and passing her CPA exam. She focused on tax planning, helping companies structure their transactions in a tax-efficient way. Her experience teaching at ECU as an adjunct during that time sparked her interest in pursuing a PhD. She enrolled in a doctoral program at Florida State University, where she researched international tax issues. Immediately upon receiving her PhD in accounting in 2016, she joined the Poole College faculty.

In the course of her studies, Lewellen became intrigued by how corporations use tax-haven countries, which typically are island countries that have a very low or no tax rate in order to attract businesses but don’t have a lot of room for those businesses to operate. The countries generate revenue through regulatory filing fees and the like.

Often, those countries have secrecy laws that could make it easier for managers to hide financial information from investors. The general public has the perception that companies using a tax-haven country strategy fall victim to managers diverting tax savings away from shareholders. Lewellen looked for empirical evidence and turned up nuanced support for that theory.

The Significance of Corporate Governance

She turned her attention to the regulatory environment of the “base” country, that is, where the company was headquartered or primarily operated. In a review of companies operating in one or more of 28 base countries, she discovered that a strong regulatory environment, such as in the United States, prevented companies from taking advantage of the opacity allowed by the tax-haven country in which they incorporated. Companies must abide by the rules of the countries in which they operate and have their headquarters.

Many people have this perception that anyone connected to a tax haven has an opportunity for managers to steal money. My research shows that’s frequently not the case.

Lewellen’s research found that only when a company operated in a country with weak corporate governance was there a strong association between tax avoidance and manager diversion of those tax savings. Her work is particularly relevant as more companies globalize and expand into other countries around the world.

“Many people have this perception that anyone connected to a tax haven has an opportunity for managers to steal money,” she said. “My research shows that’s frequently not the case.”

Tax Haven Incorporation and Financial Reporting Transparency

Building on the findings in her first paper, Lewellen then researched the effects of this tax-haven strategy on transparency of overall financial statements. This topic became her dissertation, “Tax Haven Incorporation and Financial Reporting Transparency,” which received two recognitions last year: the 2017 Outstanding International Accounting Dissertation Award and the 2017 American Taxation Association/PricewaterhouseCoopers Outstanding Dissertation Award.

When shareholders look at a firm’s financial statements, how well can they figure out what is going on with the company? How much financial information does the firm disclose? Lewellen found that whether incorporating in a tax-haven country leads to greater or less transparency in financial information depends on the strength of the regulations in the country where the firm is headquartered.

“I found the opposite of what you would expect,” Lewellen said. “Firms incorporated in a tax-haven country and headquartered in a place like the United States with strong regulations actually provided higher transparency and more disclosure to offset the bad reputation of a tax haven.”

Future Research: Impact on Shareholder Pricing

Now Lewellen is working on a third paper that explores how tax-haven strategy affects the cost of capital, the rate of return required to entice shareholders to invest. If investors perceive a company that takes advantage of a tax haven as using a risky strategy, that can dampen shareholder pricing. So, conceivably, the cost of equity financing could go up based on where the company is incorporated, regardless of the evidence that a tax-haven strategy can increase value to shareholders.


Christina Lewellen, assistant professor of accounting received two dissertation awards in 2017:

  • American Accounting Association (AAA) | 2017 American Taxation Association/PricewaterhouseCoopers (ATA/PwC) Outstanding Dissertation Award
  • American Accounting Association (AAA) | 2017 Outstanding International Accounting Dissertation Award

Preliminary results suggest that shareholders demand a higher return due to the perceived risks of incorporating in a tax-haven country.

“My students come into class thinking tax avoidance is illegal and a bad thing,” she said. “I stress it definitely is not. Legal methods of tax avoidance can be good for businesses because tax savings can increase the return on investments, and that increases value to the business.”

Making the switch from private practice to academia has proven to be a good fit for Lewellen. She enjoys working with and mentoring students. Her research has a practical impact on the practice of accounting. And she can pursue whatever research topics interest her.

“I’m always learning new things, which is fun,” she said.

Lewellen embraces NC State’s think and do philosophy. Because her research deepens investors’ understanding of tax-haven strategy, it encourages them to consider nuance and draw on their critical-thinking skills.

“Don’t believe everything you read in the media,” Lewellen urges readers. “The next time you pick up a Wall Street Journal and read about how bad tax havens are, think twice about whether that is always true.”

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