Narrow Results

This study investigates the effects of enhanced tax transparency on aggressive tax avoidance using Country-by-Country Reporting (CbCR) as the main instrument of tax transparency for deterring and preventing tax avoidance by multinational companies. We find strong empirical evidence on decreased aggressive tax avoidance by European Union multinational banks in the post-implementation period (2014–2018). We also document that banks with full CbCR implementation are less engaged in aggressive tax avoidance. Our empirical results make a significant contribution to the science, policy makers, Organisation for Economic Co-operation and Development and European Commission in terms of CbCR efficacy and future development of tax avoidance instruments.

In France, accounting regulations and tax legislation follow separate paths. Thus, the areas of nonconformity between financial accounting standards and tax laws can create opportunities for firms to engage in opportunistic behaviors. For instance, they may manipulate earnings in order to minimize tax liabilities while still presenting favorable financial results to stakeholders. This gives us an opportunity to investigate the nature of the relationship between tax avoidance (TA) and earnings management. Using a sample of 323 French firms over the period 2010–2017, we provide evidence that there is a positive simultaneous relationship between TA and earnings management. Consistent with agency theory and political-contractual perspectives, our empirical results highlight that discrepancies between accounting standards and tax laws can impact reporting practices, potentially leading to a portrayal of a more favorable financial position than the actual reality. Besides, our finding suggests that owing to the fact that French firms operate in an environment that allows substantial discretion in their financial and tax accounting decision, they could, therefore, have a greater ability to be aggressive for both financial and tax reporting purposes. Hence, it is recommended that regulators minimize the discretion in financial and tax standards. Additionally, this study will be useful for investors to adopt a higher degree of monitoring in order to reduce managerial opportunistic behavior.

We use firm-level data from ASEAN5 to examine the significance of tax-motivated profit shifting by multinational enterprises and to analyze how anti-avoidance measures mitigate the profit shifting. We show that (1) tax-motivated profit shifting is statistically and economically significant, especially for manufacturing firms, (2) auditing and transfer-pricing scrutiny is more effective in reducing profit shifting than documentation requirement alone and (3) tax-motivated profit shifting is prominent for large firms, while anti-tax avoidance measures result in the absence of profit shifting detected from small manufacturing firms. The findings have important implications for developing countries with weak governance but dependent on MNEs.

We use jurisdiction-specific effective tax rates (ETRs) to investigate income shifting as an aspect of tax avoidance by U.S. firms. Our central prediction is that tax-based incentives for shifting income, as measured by the spread between domestic and foreign ETRs, should be reflected in the share of pre-tax income earned by U.S. firms in foreign jurisdictions. The data lend substantial support to this prediction. We find robust evidence of a positive correlation between the foreign share of pre-tax income and the ETR spread that is consistent with firms shifting income both into and out of the United States. The evidence also indicates that firms respond asymmetrically to positive and negative ETR spreads. Specifically, the response to a negative spread is stronger than to a positive spread of the same magnitude.

The paper examines the relationship between ownership concentrations and tax avoidance for small–medium enterprises (SMEs) in India. With a panel dataset built from small- and medium-sized enterprise surveys over the period between 2013 and 2014, we find that SMEs with concentrated ownership have a negative association with tax avoidance. The result is more pronounced for SMEs headquartered in states/provinces with stronger economic and institutional environment. The results also indicate that for any two SMEs with similar levels of ownership concentration, the SME with higher capital needs is more likely to avoid taxes.

This study examines the association between firms’ tax avoidance and long-term investments. We find that tax avoidance firms make greater investment than nontax avoidance firms, and that the positive association between tax avoidance and investments holds both for firms that are financially constrained, and therefore ex-ante likely to underinvest, and for financially unconstrained firms that are ex-ante more likely to overinvest. Our results further show that CEO equity incentives and governance strength exert an incremental effect on investment decisions of tax avoidance firms. In additional analyses, we demonstrate that tax avoidance firms’ investments are associated with improved future firm performance especially when those firms are ex-ante more likely to underinvest. For tax avoidance firms that are ex-ante more likely to overinvest, current investments are associated with declined future firm performance. Tax avoidance firms have higher (lower) investment efficiency in terms of improved (declined) operating profitability in the post-investment period when they have lower (higher) CEO equity incentives and stronger (weaker) governance. Overall, our results shed light on efficiency in utilizing the available cash through tax avoidance in long-term investments that might create shareholder value for a group of financially constrained firms but diminish shareholder value for another group of financially unconstrained firms.

In this paper, we investigate how a firm’s reputation affects its tax planning. Drawing on the moral licensing view, we utilize a substantial dataset to test the relationship between a firm’s overall reputation standing and its propensity for tax avoidance, employing a variety of tax-related measures capturing different tax avoidance tactics. We hypothesize and find that firms with higher reputations are more inclined to engage in tax avoidance, often through tax strategies that involve a certain degree of ambiguity in transgression. Furthermore, our study indicates that highly reputable firms are less likely to participate in tax strategies that are blatant transgressions. This study adds to the body of knowledge on the correlation between reputation and tax avoidance. We enhance this field by proposing and examining the moral licensing view as a complementary perspective to comprehend this dynamic. The results of our study indicate that the deterrent power of reputation in tax avoidance may be overestimated, yielding significant insights for policymakers and practitioners.

This paper investigates the associations of auditor-provided tax services (APTS) with tax planning and audit quality using a German sample. Our findings differ from those of previous U.S. studies, which we attribute to the fact that prior to 2015, the International Financial Reporting Standards (IFRS) did not contain a clear regulation similar to FIN 48, which requires firms to reserve for tax uncertainties. We find for our IFRS sample a negative association between APTS and tax avoidance, which suggests that auditors are aware that firms might not reserve for tax uncertainties and may advise more conservative tax strategies. Additionally, we find a positive relation between the level of APTS and the sustainability of tax strategies in client firms, consistent with this conservative approach. Furthermore, our results show that APTS are positively related to audit quality for our sample. This finding suggests that auditors, being aware of remaining tax uncertainties that are not reserved for, are more reluctant to accept earnings management, which would further increase the risk of restatement. Taken together, the results of our study suggest the importance of accounting standards regarding tax uncertainties for the implications of APTS.

We examine the relation between tax aggressiveness and firm value. Using a tax enforcement change in Taiwan that limits firms’ abilities to pursue aggressive tax strategies, we document that the relation between tax aggressiveness and firm value becomes more negative after the regulatory change. Further analyses reveal that the negative change is more pronounced for firms that are more likely to be targeted by the stricter tax enforcement. In addition, we do not find strong evidence on the impact of corporate governance in moderating the main relation. Our results seem to be consistent with the argument that potential increases in regulatory costs may outweigh the benefit of the stricter tax enforcement in constraining insiders’ income diversion, intensifying the conflict between aggressive tax positions and shareholder wealth in our research setting.

Synopsis

The research problem

This paper explores the association between postmaterialistic culture and corporate tax-avoidance behavior.

Motivation

Although corporate tax avoidance is prevalent, the degree of tax avoidance varies across countries. Previous studies have suggested that national culture is associated with the level of tax avoidance (e.g., corruption culture in [DeBacker, J., Heim, B. T., & Tran, A. (2015). Importing corruption culture from overseas: Evidence from corporate tax evasion in the United States. Journal of Financial Economics, 117(1), 122–138. https://doi.org/10.1016/j.jfineco.2012.11.009], and societal trust in [Kanagaretnam, K., Lee, J., Lim, C. Y., & Lobo, G. J. (2018). Societal trust and corporate tax avoidance. Review of Accounting Studies, 23(4), 1588–1628. https://doi.org/10.1007/s11142-018-9466-y], among others). Unlike prior studies focusing on longstanding cultural factors, this paper examined the association between corporate tax avoidance and an important current culture trend, i.e., postmaterialistic culture.

The test hypotheses

There is no association between postmaterialistic culture and corporate tax avoidance.

Target population

Various stakeholders that care about corporate tax avoidance including the government, policymakers, investors, auditors, and firm managers.

Adopted methodology

Linear Probability Model and Ordinary Least Squares regressions.

Analyses

We examined the association between postmaterialistic culture and corporate tax-avoidance behavior. We used a proprietary dataset of China tax audits spanning the 2011–2014 period and tested the moderating effect of tax enforcement. We also examined the external validity of our results using a cross-country sample from 21 countries over the 1993–2014 period.

Findings

Using a proprietary dataset of China tax audits, we found that firms owned by investors from countries with higher postmaterialism values were less likely to engage in tax-avoidance behavior in China. In addition, we found some evidence that the negative association between postmaterialism and tax avoidance is more pronounced when tax enforcement is stronger, indicating that national culture and formal institutions act as complements. To check the external validity of our main results, we further used a cross-country sample from 21 countries over 22 years. The evidence from the cross-country sample was consistent with the findings obtained from the China tax audits setting.

The research problem

We evaluated the effectiveness of statutory auditors as a tax inspection mechanism and examine a regulation change that occurred in Greece. In 2011, the Greek State passed a directive requiring that statutory auditors audit and certify the tax compliance of medium and large firms, and issue a Tax Compliance Report (TCR).

Motivation

The evidence on the auditors’ effect on tax avoidance is quite limited. Our research setting constitutes a unique quasi-natural experiment to evaluate auditors’ effectiveness and firms’ tax avoidance behavior under a new tax compliance regime.

The test hypothesis

We tested the following hypothesis: Tax avoidance was significantly reduced in the post-TCR period for firms subject to TCR.

Target population

Our target population consisted of firms that are subject to audits from statutory auditors for tax compliance purposes.

Adopted methodology

We employed a difference-in-differences design with Greek firms subject to TCR as the treated group and the rest of the Greek firms as the control group. We examined potential differences from the TCR enforcement for the two groups.

Analysis

Our main analysis presents results for the treated and the control groups regarding their non-conforming and conforming tax avoidance behavior in the pre- and the post-TCR period. Non-conforming refers to activities that reduce taxable income but leave book income unaffected, whereas conforming tax avoidance refers to activities that reduce both taxable income and book income. Additional analysis evaluates the effect of Big 4 audit firms, increased audit effort, and assignment of the TCR to the financial statements’ auditor.

Findings

Our empirical results suggest that non-conforming tax avoidance for treated firms (i.e., firms subject to tax audits) significantly decreased in the post-TCR period compared with that of the control sample (i.e., firms not subject to tax audits). Conversely, conforming tax avoidance increased. This evidence suggests that treated firms switched from non-conforming to conforming tax avoidance activities. Our results hold irrespective of the size of the audit firm that performed the TCR program, but we find that increased audit effort to accomplish the TCR program and the assignment of the TCR to the auditor who also audited the financial statements had an incremental impact on the reduction of non-conforming tax avoidance.

Synopsis

The research problem

This study investigates the relationship between the incentive of Japanese non-profit organizations to avoid losing their tax-exempt status and the extent of tax-motivated expense allocation.

Motivation

Prior studies have shown that for joint overhead expenses, organizations can lower their tax burden by transferring costs from non-taxable to taxable activities. However, tax authorities may also investigate non-profits that report excessive profits without incurring expenses for non-taxable activities and penalize them by depriving them of their tax-exempt status. This deprivation of tax exemptions specific to non-profit organizations causes serious problems for such organizations in terms of the economic impact of increased income taxes and the loss of social value from donors. In Japan, non-profit organizations are deprived of tax-exempt status if the ratio of expenses from taxable activities to total expenses (TaxExpRatio) exceeds a regulatory threshold of 50%. We estimated the tax-motivated expense allocation and non-taxable activities, defining the term TaxExpRatio before the allocation as TRBA. In addition, we assumed that a larger board of directors has a stronger incentive to protect the non-profit’s tax-exempt assets because individuals or organizations that provide resources to non-profits often become board members, who thus conduct stronger monitoring to avoid losing the tax-exempt status.

The test hypotheses

We hypothesized that when the TRBA exceeds the regulatory threshold, non-profits allocate less discretionary expense to taxable activities. We further posited that board size moderates the relationship between the TRBA exceeding the regulatory threshold and allocation of discretionary expenses to taxable activities.

Target population

We specifically considered the Japanese regulatory environment related to public-interest incorporated associations and foundations (PIIAs and PIIFs, referred to as Japanese non-profit organizations), which are tax-exempt organizations engaged in a wide range of public work.

Adopted methodology

We estimated the expense allocated from non-taxable to taxable activities in a non-profit organization based on Hofmann (2007) and Omer & Yetman (2007). We also estimated regressions using pooled cross-sectional and ordinary least squares (OLS) regression models.

Analysis

By using 12,027 firm-year observations (4,763 distinct non-profit organizations in Japan), we estimated the regression model for the incentive to avoid losing tax-exempt status in non-profit organizations.

Findings

We found that non-profits with TRBA over the regulatory threshold tend to allocate less expenses to taxable activities. In addition, the empirical results show that the relationship between TRBA over the regulatory threshold and allocated expenses to taxable activities is moderated by board size. This finding suggests that larger boards in non-profit organizations are more incentivized to reduce tax avoidance behavior that may result in losing their tax-exempt status.

Synopsis

The research problem

This study examines the impact of chief executive officers (CEOs)’ early-life disaster experiences on corporate tax-avoidance behaviors and explores the mechanisms through which these experiences influence these behaviors. We use the Great Chinese Famine of 1959–1961 (hereafter the Great Famine) as an indicator of early-life disaster experience.

Motivation or theoretical reasoning

Our study is motivated by the following reasons. First, like many major economies worldwide, corporate income tax is an important source of tax revenue in China. The financial impact of corporate income tax on a country’s economy is enormous. Second, the Great Famine was one of the most destructive natural disasters in human history, which is likely to have a lifelong influence on CEOs who lived through the disaster as children and teenagers. Third, corporate tax strategy is a significant accounting, financing, and managerial behavior of firms that is influenced by multiple internal and external factors. However, there are limited findings on the impact of CEOs’ early-life disaster experience on corporate tax decisions. The consequences of this impact remain unclear.

The test hypotheses

We hypothesize that CEOs’ early-life famine experience mitigates corporate tax aggressiveness. We also consider the alternative hypothesis that CEOs’ early-life famine experience increases corporate tax aggressiveness.

Target population

Our sample includes Chinese listed firms from 2013 to 2020 led by CEOs who have or who do not have early-life disaster experiences.

Adopted methodology

We employed ordinary least square regressions in our analyses.

Analyses

Since the Great Famine occurred between 1959 and 1961, we considered CEOs to have experienced famine if they were born prior to or in the year 1961, in a province affected by the Great Famine (e.g., Hu et al., 2020; Zhang, 2017). We identified a province as significantly affected by famine if its abnormal death rate was greater than the median abnormal death ratio of all Chinese provinces during the period of famine. Following Dyreng et al. (2010), Hoi et al. (2013), Koester et al. (2017), and Rego & Wilson (2012), we used effective tax rate as the first proxy of tax avoidance for a firm. Additionally, in line with Desai & Dharmapala (2006) and Hoi et al. (2013), we used the discretionary book-tax differences of firms as an alternative proxy to measure corporate tax avoidance.

Findings

The findings indicate that CEOs who experienced the Great Famine at a young age significantly reduced their firms’ tax-avoidance efforts. Furthermore, the negative association between CEOs’ early-life famine experiences and corporate tax-avoidance behaviors is more pronounced for companies with higher independent director ratios. These negative associations appear more obvious for firms with CEOs who experienced famine early in life and for females. The economic mechanism of the findings demonstrate that CEOs’ famine experiences make them more conservative in investing in innovative projects; they are more likely to fulfill corporate social responsibility and work in state-owned enterprises. Furthermore, firms with lower innovation expenditure, effective corporate social performance, and government ownership are less likely to display tax-avoidance behaviors.

We analyze the valuation-tax avoidance relation and find there is, in fact, a market value discount for tax avoidance. We identify several channels for the adverse valuation effects of tax avoidance. Tax-avoiding firms that (i) lack foreign income, (ii) are financially constrained, and (iii) incur relatively high capital expenditures have lower valuations. A portfolio long the highest and short the lowest tax-avoiding firms has a significantly positive four-factor alpha, highlighting greater risk and thus lower valuation associated with tax avoidance. Our results are robust to a variety of tests, including several different tax avoidance measures.

States around the world appear more determined than ever to end tax haven abuse. The new U.S. administration, for example, is taking action against both major tax haven problems: corporation income tax avoidance and personal income tax evasion. Some progress may be made. This essay argues, however, that only radically new policy will likely suffice either to shore up corporate tax revenues or to sharply diminish evasion. Global formula apportionment is needed if the corporate income tax is to be preserved, and only a combination of automatic information sharing among governments and source withholding can stamp out evasion. As in most areas of international economic policy, U.S. leadership is essential.

This case discusses tax avoidance in China, which has a long history. The Chinese generally believe taxes are too high, and people do not believe that they are getting much by way of benefits in exchange for their payments. Even famous entrepreneurs share this opinion. The case discusses the relevance of tax paying in China, Confucian values, and the overall business atmosphere in China.