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Journal ArticleDOI

Does Tax Enforcement Disparately Affect Domestic versus Multinational Corporations Around the World

TL;DR: This article examined whether there is a differential relation between changes in enforcement spending and the tax avoidance of domestic versus multinational entities using OECD data on 47 countries from 2005 to 2013, finding that increases in home-country enforcement spending are related to less firm-level tax avoidance for domestic firms relative to multinational entities.
Abstract: Global tax enforcement has received increased attention since the Financial Crisis, with much stated focus on curbing perceived harmful tax practices of multinational entities. Yet multinationals can avoid tax in multiple countries whereas domestic firms cannot. We therefore examine whether there is a differential relation between changes in enforcement spending and the tax avoidance of domestic versus multinational entities. Using OECD data on 47 countries from 2005 to 2013, we find increases in home-country enforcement spending are related to less firm-level tax avoidance for domestic firms relative to multinational entities. Although we find no differential relation between changes in tax enforcement and home-country tax avoidance between multinational and domestic firms, multinationals increase their tax avoidance in foreign countries when home-country enforcement increases, which allows them to maintain a consistent level of worldwide tax avoidance. Results are robust to multiple measures of tax enforcement and avoidance across multiple countries and databases.
Citations
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Posted Content
TL;DR: The authors investigate the consequences of public disclosure of information from company income tax returns filed in Australia and find that investors react negatively to anticipated and actual disclosure of tax information, most likely due to anticipated policy backlash rather than consumer backlash or the revelation of negative information about cash flows.
Abstract: We investigate the consequences of public disclosure of information from company income tax returns filed in Australia. Supporters of more disclosure argue that increased transparency will improve tax compliance, while opponents argue that it will divulge sensitive information that is, in many cases, misunderstood. Our results show that in Australia large private companies experienced some consumer backlash and, perhaps partly in anticipation, some acted to avoid disclosure. We detect a small increase (decrease) in tax payments for private (public) firms subject to disclosure suggesting differential costs of disclosure across firms. Finally, we find that investors react negatively to anticipated and actual disclosure of tax information, most likely due to anticipated policy backlash rather than consumer backlash or the revelation of negative information about cash flows. These findings are important for both managers and policy makers, as the trend towards increased tax disclosure continues to rise globally.

46 citations

Posted Content
TL;DR: This paper investigated the influence of corporate tax avoidance on industry concentration in the U.S. since the mid-1990s and found a positive and causal impact of CTA on firm-level sales using three alternative identification strategies.
Abstract: This paper investigates the influence of corporate tax avoidance (CTA) on industry concentration in the U.S. since the mid-1990s. A simple model shows CTA increases concentration if (i) CTA gives a competitive advantage to avoiding firms, and (ii) CTA of large relative to small firms increases. We find a positive and causal impact of CTA on firm-level sales using three alternative identification strategies. We then show CTA increases more among the largest firms in most industries, which reinforces their dominant position. In key industries, the differences in tax aggressiveness between large and small firms explain 10% to 30% of the increase in concentration over the last 25 years. CTA-induced changes in the CR4 index influence industrial real output to an extent that is relevant at the macroeconomic scale.

10 citations

Journal ArticleDOI
TL;DR: In this article, the relation between patent concentration and tax-motivated income shifting is studied. And the results suggest that patent concentration shapes an MNC's incentives to shift income via patents.
Abstract: We study the relation between patent concentration and tax-motivated income shifting. Using affiliate-level data for European multinational corporations (MNCs) and employing the relative share of patents held by an MNC as a measure for patent concentration, we predict and find that tax-motivated income shifting is increasing in the degree of patent concentration. This effect is economically meaningful: A one standard deviation higher patent concentration increases the extent to which affiliate-level profits are sensitive to income-shifting incentives by 25.6 percent. Additional tests exploiting variation in the information set of the local tax authority suggest that patent concentration facilitates tax-motivated income shifting by reducing comparable information available to the local tax authority. Overall, our results suggest that patent concentration shapes an MNC’s incentives to shift income via patents. Our findings also indicate that the effectiveness of tax-policy measures in curtailing this form of income shifting critically depends on their ability to improve the information set of the local tax authority.

9 citations


Cites background from "Does Tax Enforcement Disparately Af..."

  • ...In the wake of these initiatives, countries are taking regulatory actions to curtail tax-motivated income shifting, for instance, by introducing anti-avoidance legislation (Lohse and Riedel, 2013) or by tightening tax enforcement (De Simone, Stomberg, and Williams, 2019b)....

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  • ...First, several countries have recently tightened their tax enforcement (De Simone et al., 2019b) where the OECD stresses the importance of assessing firms with high intangible-asset intensity (OECD, 2017a)....

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Journal ArticleDOI
TL;DR: In this paper, the authors provide new evidence on the association of state ownership and tax planning and show that shareholders' monitoring incentives affect a firm's tax planning. But they do not consider the effect of state owners directly benefiting from state-owned enterprises' (SOEs) income tax payments.
Abstract: In this paper, we provide new evidence on the association of state ownership and tax planning and show that shareholders’ monitoring incentives affect a firm’s tax planning. Using the unique setting of the German corporate tax system, we distinguish between state owners that directly benefit from state-owned enterprises’ (SOEs’) income tax payments and those that do not. Our results indicate that the negative association between state ownership and tax planning is concentrated in SOEs where the state owner directly benefits from the tax payments. These results are robust to various specifications and suggest that shareholders’ monitoring incentives are a determinant of firms’ tax planning activities.

4 citations


Cites background from "Does Tax Enforcement Disparately Af..."

  • ...First, we contribute to the literature on the role of agency conflicts in corporate tax planning (Desai and Dharmapala 2006). Following the agency framework of Desai and Dharmapala (2006), prior studies investigate the effect of a firm’s corporate governance structure on the association of state ownership and tax planning....

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Journal ArticleDOI
TL;DR: In this article , the authors investigated whether IFRS adoption affects corporate tax avoidance and how the impact of IFRS varies with country-level institutions, and they found that firms with a lower (higher) initial level of tax avoidance tend to be more tax aggressive after adopting the International Financial Reporting Standards (IFRS).
References
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Journal ArticleDOI
TL;DR: In this paper, an analysis of the individual taxpayer's decision on whether and to what extent to avoid taxes by deliberate underreporting is presented, based on a simple static model where this decision is the only one with which the individual is concerned, so that we ignore the interrelationships that probably exist with other types of economic choices.

4,106 citations

Journal ArticleDOI
TL;DR: The authors examine the effect of securities laws on stock market development in 49 countries and find little evidence that public enforcement benefits stock markets, but strong evidence that laws mandating disclosure and facilitating private enforcement through liability rules benefit stock markets.
Abstract: We examine the effect of securities laws on stock market development in 49 countries. We find little evidence that public enforcement benefits stock markets, but strong evidence that laws mandating disclosure and facilitating private enforcement through liability rules benefit stock markets.

1,769 citations

Posted Content
TL;DR: The authors analyzes the origins of this tax haven activity and its implications for the US and foreign governments, showing that American companies report extraordinarily high profit rates on both their real and their financial investments in tax havens.
Abstract: The offshore tax haven affiliates of American corporations account for more than a quarter of US foreign investment, an nearly a third of the foreign profits of US firms. This paper analyzes the origins of this tax haven activity and its implications for the US and foreign governments. Based on the behavior of US fins in 1982, it appears that American companies report extraordinarily high profit rates on both their real and their financial investments in tax havens. We calculate from this behavior that the tax rate that maximizes tax revenue for a typical haven is around 6%. The revenue implications for the US are more complicated, since tax havens may ultimately enhance the ability of the US government to tax the foreign earnings of American companies.

962 citations

Journal ArticleDOI
TL;DR: This paper examined the association between firm size and effective corporate tax rates and found that the roughly fifty largest U.S. exchange-listed firms have significantly higher worldwide tax rates than other firms.

808 citations


"Does Tax Enforcement Disparately Af..." refers background in this paper

  • ...We also include controls for cash holdings (Cash) and firm size (Ln(Assets)) because these factors have been shown in prior literature to affect incentives for tax avoidance (e.g., Edwards, Schwab, and Shevlin 2016; Law and Mills 2015; Zimmerman 1983)....

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Journal ArticleDOI
TL;DR: The authors analyzes the origins of this tax haven activity and its implications for the US and foreign governments, showing that American companies report extraordinarily high profit rates on both their real and their financial investments in tax havens.
Abstract: The offshore tax haven affiliates of American corporations account for more than a quarter of US foreign investment, an nearly a third of the foreign profits of US firms. This paper analyzes the origins of this tax haven activity and its implications for the US and foreign governments. Based on the behavior of US fins in 1982, it appears that American companies report extraordinarily high profit rates on both their real and their financial investments in tax havens. We calculate from this behavior that the tax rate that maximizes tax revenue for a typical haven is around 6%. The revenue implications for the US are more complicated, since tax havens may ultimately enhance the ability of the US government to tax the foreign earnings of American companies.

804 citations