Corporate tax competition between firms

Firms’ tax planning decisions, similar to their other operational decisions, are made in a competitive environment. Various stakeholders observe the tax payments and evaluate these against the relevant peer group. This implies firms might not simply minimise their tax burden, but also consider their competitors behaviour when deciding about tax planning. Empirically this creates interdependencies in the tax planning activities of firms. Introducing the concept of a reputational loss we show the positive interdependence in a theoretical model and test it in a spatial econometric model. Empirical evidence suggests that benchmarking takes place both within countries and within industries, however for the latter it is important to include firms in large non-EU OECD countries.     

Corporate tax avoidance and high-powered incentives

This paper analyzes the links between corporate tax avoidance and the growth of high-powered incentives for managers. A simple model demonstrates the role of feedback effects between tax sheltering and managerial diversion in determining how high-powered incentives influence tax sheltering decisions. A novel measure of corporate tax avoidance (the component of the book-tax gap not attributable to accounting accruals) allows for an investigation of the link between tax avoidance and incentive compensation. Increases in incentive compensation tend to reduce the level of tax sheltering, in a manner consistent with a complementary relationship between diversion and sheltering. In addition, this negative effect is driven primarily by firms with relatively weak governance arrangements, confirming a central prediction of the model. These results can help explain the growing cross-sectional variation among firms in their levels of tax avoidance, the undersheltering puzzle, and why large book-tax gaps are associated with subsequent negative abnormal returns.     

Smoke and mirrors: Corporate social responsibility and tax avoidance

The bourgeoning corporate social responsibility literature has paid little attention to organised tax avoidance by companies even though it has real consequences for the life chances of millions of people. Companies legitimise their social credentials by making promises of responsible and ethical conduct, but organisational culture and practices have not necessarily been aligned with publicly espoused claims. This paper draws attention to the gaps between corporate talk, decisions and action, or what may be characterised as organised hypocrisy. Its persistence can become a liability and threaten the welfare of the company, its employees and its executives. The paper provides examples to show how companies, including major accountancy firms, make promises of responsible conduct, but indulge in tax avoidance and evasion. It also shows that the exposure of contradictions between talk and action has yielded negative outcomes.     

Family firms,tax avoidance,and socioemotional wealth: evidence from tax reform in Taiwan

Review of Quantitative Finance and Accounting - In 2018, Taiwan implemented a tax reform package that abolished the imputation regime, providing managers stronger incentive to engage in tax...     

Corporate tax avoidance and stock price crash risk: Firm-level analysis

Using a large sample of U.S. firms for the period 1995–2008, we provide strong and robust evidence that corporate tax avoidance is positively associated with firm-specific stock price crash risk. This finding is consistent with the following view: Tax avoidance facilitates managerial rent extraction and bad news hoarding activities for extended periods by providing tools, masks, and justifications for these opportunistic behaviors. The hoarding and accumulation of bad news for extended periods lead to stock price crashes when the accumulated hidden bad news crosses a tipping point, and thus comes out all at once. Moreover, we show that the positive relation between tax avoidance and crash risk is attenuated when firms have strong external monitoring mechanisms such as high institutional ownership, high analyst coverage, and greater takeover threat from corporate control markets.     

The role of accountancy firms in tax avoidance: Some evidence and issues

As entrepreneurial businesses, accountancy firms have supplemented their traditional trade of selling accounting and auditing services by diversifying into a variety of other products and services. They have developed organisational structures and strategies to sell tax avoidance schemes to corporations and wealthy individuals. The sale of such services shifts tax burdens to less mobile capital and less well-off citizens. It also erodes the tax base and brings the firms into direct conflict with the state. This paper provides some evidence of the strategies and tactics used by accountancy firms to sell schemes that enable their clients to avoid corporate, sales and payroll taxes. Such strategies stimulate reflections upon the possible trajectories in the development of accountancy firms and social consequences of their trade.     

The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms

This paper examines the determinants of thinly capitalized structures of publicly-listed Australian firms. Based on a hand-collected sample of 203 publicly-listed Australian firms over the 2006–2009 period (812 firm-years), our regression results indicate that the thin capitalization position of firms is significantly and positively associated with multinationality, tax haven utilization, withholding taxes and tax uncertainty. Multinationality and the use of tax havens are, in particular, strongly associated with thin capitalization. Our additional regression results provide evidence that shows that corporate governance monitoring mechanisms relating to board of director independence, institutional ownership and big-4 auditor utilization are significantly negatively associated with firms adopting thinly capitalized tax avoidance structures.     

Advertising and tax avoidance

Review of Quantitative Finance and Accounting - We examine the link between firms’ advertising and their tax avoidance. By generating customer awareness, advertising helps shape firm image...     

Languages and corporate tax avoidance

Review of Accounting Studies - This paper examines the effect of languages on corporate tax avoidance. We hypothesize and find that managers of firms in countries with languages that grammatically...     

Banking deregulation and corporate tax avoidance

We investigate whether tax avoidance substitutes for external financing. We exploit interstate banking deregulation as a quasi-external shock to examine whether...     

Societal trust and corporate tax avoidance

Using an international sample of firms from 25 countries and a country-level index for societal trust, we document that societal trust is negatively associated with tax avoidance, even after controlling for other institutional determinants, such as home country legal institutions and tax system characteristics. We explore the effects of two country-level institutional characteristics—strength of legal institutions and capital market pressure—on the relation between societal trust and tax avoidance. We find that the relation between trust and tax avoidance is less pronounced when the legal institutions in a country are stronger and is more pronounced when the capital market pressure is stronger. Finally, we examine the relation between societal trust and tax evasion, an extreme and illegal form of tax avoidance. We show that societal trust is negatively related to tax evasion and the negative relation is less pronounced when legal institutions are stronger.     

Military experience and corporate tax avoidance

We find that managers with military experience pursue less tax avoidance than other managers and pay an estimated $1–$2 million more in corporate taxes per firm-year. These managers also undertake less aggressive tax planning strategies with smaller tax reserves and fewer tax havens. Although they leave tax money on the table, boards hiring these managers benefit from reductions in other gray areas in corporate reporting. The broad implications are as follows: for employee selection, boards can consider employees’ personal characteristics as a control mechanism when outputs are difficult to contract ex ante or measure ex post.     

Stock liquidity and corporate tax avoidance

We show that firms with higher stock liquidity engage less in extreme (i.e., overly aggressive or overly conservative) tax avoidance. The effect of stock liquidity on tax avoidance is economically meaningful and robust across alternative measures of tax avoidance and stock liquidity. The findings also hold after controlling for potential endogenous effects. We further document that the effect of stock liquidity on tax avoidance is amplified for firms with high proportions of activist shareholders and attenuated for firms with high levels of stock price informativeness. Overall, our findings suggest that stock liquidity mitigates extreme tax avoidance by enhancing shareholders’ monitoring over firm management.

     

Corporate governance and risk-taking: Evidence from Japanese firms

This paper examines the influence of corporate governance on the risk taking of Japanese firms. We show that family control and ownership concentration are associated with higher idiosyncratic risk, whereas bank control has the opposite effect. Considering the link between idiosyncratic risk and firm performance, the results provide an economic rationale for the higher (lower) performance of family-controlled firms (bank-controlled firms). The results also explain the higher performance of firms with concentrated ownership by relating their governance structures to the risk-taking strategies that generate greater competitive advantages. Finally, we show that the impact of governance structures on risk taking is stronger after controlling for endogeneity.     

Corporate and personal income tax declarations

Decisions by firms and individuals on the extent of their tax payments have generally been treated as separate choices. Empirically, a positive relationship between corporate and personal income tax evasion can be observed. The theoretical analysis in this paper shows that a manager's decision on the firm's behaviour will be independent of his personal preferences if the gain from reducing corporate tax payments is certain, as in the case of tax avoidance. If, however, the firm evades taxes so that the manager's income depends on whether the firm's activities are detected or not, corporate and personal income tax evasion choices cannot be separated. Jel Code H 24 · H 25 · H 26     

Tax avoidance in government-owned firms: Evidence from Italy

This paper studies whether and why government-owned firms avoid taxation to a greater extent than wholly privately-owned firms do. By considering a sample of Italian listed corporations for the period between 2006 and 2011, it was found that government ownership had a systematically negative effect on corporate effective tax rate, with a prevalence of tax-planning policies focused on the long term. Managers of local government-owned firms focused on minimizing costs, even if this was to the detriment of national tax-revenue collection.     

Determinants of tax haven utilization: evidence from Australian firms

This paper examines the major determinants of tax haven utilization based on a sample of 200 publicly listed Australian firms, over the 2006–2010 period (1,000 firm‐years). Our regression results show that variables relating to transfer pricing, intangible assets, an interaction term between transfer pricing and intangible assets, withholding taxes, performance‐based management remuneration and multinationality are positively associated with tax haven utilization. We also find that corporate governance structures are negatively associated with tax haven utilization. The magnitude and significance of the regression coefficients indicate that transfer pricing, withholding taxes, intangible assets, an interaction term between transfer pricing and intangible assets, corporate governance and multinationality are the most important drivers of tax haven utilization.     

Corporate tax payments under formulary apportionment: Evidence from the financial reports of 50 major U.S. multinational firms

Under a formulary apportionment system of taxing multinational corporate income, U.S. tax liabilities would be based on the product of a multinational firm's worldwide income and the fraction of their real activities that occur in the United States – typically, an average of asset, payroll, and sales shares. This analysis utilizes financial reporting data for 50 large U.S. multinational firms to analyze how tax payments would change under a possible formulary system, updating Shackelford and Slemrod (1998). Our time period is 2005–2007 instead of 1989–1993. We find that tax payments under formulary apportionment would increase modestly overall but by a lower magnitude than found by Shackelford and Slemrod. Given the changes in the international tax environment since the earlier time period, this is a puzzling finding; we speculate regarding possible explanations.     

Corporate social responsibility and tax aggressiveness: An empirical analysis

This study examines the association between corporate social responsibility (CSR) and corporate tax aggressiveness. Based on a sample of 408 publicly listed Australian corporations for the 2008/2009 financial year, our regression results show that the higher the level of CSR disclosure of a corporation, the lower is the level of corporate tax aggressiveness. We find a negative and statistically significant association between CSR disclosure and tax aggressiveness which holds across a number of different regression model specifications, thus more socially responsible corporations are likely to be less tax aggressive in nature. Finally, the regression results from our additional analysis indicate that the social investment commitment and corporate and CSR strategy (including the ethics and business conduct) of a corporation are important elements of CSR activities that have a negative impact on tax aggressiveness.