The Financial Reporting Effects of Book-Tax Conforming Goodwill Impairments

We investigate whether special tax deductions for goodwill impairments influence financial reporting decisions. Unlike most countries, Luxembourg allows tax deductions for goodwill impairments without the need to dispose of any assets. We predict and find that multinational firms with subsidiaries in Luxembourg are more likely to write-down goodwill, and write down larger amounts of goodwill on average, than multinational firms without subsidiaries in Luxembourg. However, we find that conditional on recording a goodwill impairment, the amount of each goodwill write-down does not differ between multinational firms with and without Luxembourg subsidiaries. This is consistent with tax deductibility of goodwill impairments inducing more timely, rather than larger, impairments. We contribute to the literature on the interaction between book and tax reporting, the determinants of goodwill impairments, and the effects of book-tax conformity. This is one of the few studies that looks at the mechanisms through which firms avoid tax, in particular, examining a previously unexplored aspect of tax haven usage.