Discussion of Dhaliwal, Goodman, Hoffman, and Schwab (2019): Revisiting Tax-Related Reputational Costs

In this study, we examine the incidence, valuation and management of tax-related reputational costs during the window surrounding the Occupy Wall Street (OWS) movement, a period characterized by heightened awareness and scrutiny of corporate tax avoidance. We report four main results. First, consistent with firms incurring tax-related reputational costs, we find that tax avoidance is positively associated with negative news media sentiment during the period surrounding the Occupy Wall Street (OWS) movement. Second, consistent with tax-related reputational costs resulting in negative valuation consequences, we find that (1) firm value, measured using Tobin’s q, is negatively associated with tax avoidance during the OWS period and (2) a hedge portfolio long (short) in firms exhibiting low (high) levels of tax avoidance generates significant positive abnormal returns during the OWS window. Third, consistent with firms taking actions to manage potential tax-related reputational damage, we find that firms experiencing the largest reputational costs during the OWS window exhibit higher tax rates in the following year. Fourth, to provide assurance that our results are due to reputational costs and not political costs, we re-estimate our analyses after excluding firms operating in politically-sensitive industries and find that all inferences hold. We provide some of the first large sample evidence of tax-related reputational costs and how these costs vary with public perception of tax avoidance.

The present study was designed to determine the relationship between corporate governance and tax avoidance in an international setting. Financial and governance data sourced from the Datastream database for a sample of Japanese and UK firms between 2012 and 2017 are used. First, we examine the direct effect of several corporate governance mechanisms on tax avoidance. Second, we divide the full sample into two groups (common law and code law legal system) to explore the relationship between law, corporate governance, and tax avoidance. We use both univariate and feasible generalized least square (FGLS) regression methods to examine our hypotheses. This study finds that the board size, independent directors, and the presence of women on boards of directors reduce the likelihood of tax avoidance. However, we find an insignificant association between ownership concentration and tax avoidance. Second, it also finds that firms in countries with higher country-level governance engage in less tax avoidance. The results also suggest that the role of corporate governance is more pronounced for firms operating in common law countries than those in code law countries. This manuscript is one of the few studies that examine the relationship between corporate governance and tax avoidance in an international setting with different legal and institutional environment. This relationship differs across the two countries. This paper clearly identifies implications for research, practice, and society. It documents that when a country implements a good system of governance, which targets improving transparency and accountability, it will lead to less corporate tax avoidance.

The participation of Communist Party of China （thereafter CPC） in corporate governance is an important feature of corporate governance structure in China. CPC organizations play a political core or political leading role in both state-owned and non-state-owned companies. The institution “two-way entry and cross-appointment” combines CPC organizations with governance mechanisms such as the board of directors and the board of supervisors organically and enables CPC organizations to play significant roles in companies’ major production and operation activities. Tax avoidance not only means that more wealth can be left in companies, but also relates higher legal/regulatory risks, reputational risks, agency problems （especially “rent diversion”） and increased opacity. As an important strategic activity of a company, tax avoidance is inevitably affected by corporate governance. Although there is plenty of literature about the relationship between corporate governance and tax avoidance, it is not clear whether CPC’s participation in corporate governance through “two-way entry and cross-appointment” has a significant impact on tax avoidance activities. Using the data of A-share non-financial listed companies from 2009 to 2016, this paper examines the impact of CPC’s participation in corporate governance through “two-way entry and cross-appointment” on corporate tax avoidance. The results show that “two-way entry” has little impact on tax aggressiveness, while “cross-appointment” has a significantly negative effect on tax aggressiveness. Further tests show that “cross-representation” can decrease the likelihood that the degree of tax aggressiveness is extremely high, but it could not lead to extremely low tax aggressiveness. The results also show that “cross-appointment” can decrease tax aggressiveness significantly when it is at a high level, while the effect is not significant when it is at a low level. In summary, CPS’s participation in corporate governance has a negative effect on tax aggressiveness only when tax aggressiveness is at a high level. In addition, there is no significant difference in the impact of “cross-appointment” between state-owned and non-state-owned companies, although the authors only find weak evidence to support the negative effect of “cross-appointment” on tax avoidance in non-state-owned companies. There is no significant difference in the effect of “cross-appointment” on tax avoidance before and after 2013 either. This paper makes three contributions to the literature: First, it provides empirical evidence on the economic consequences of CPC’s participation in governance from the perspective of corporate tax avoidance behaviors. It is helpful to understand the role of CPC’s participation in governance in suppressing corporate misconduct and promoting better fulfillment of corporate tax obligations. Second, it explores and finds the asymmetric effect of CPC’s participation in governance on tax avoidance. It implies that the participation of CPC in governance will not prevent companies from normal and low risk-related tax avoidance activities. Such results extend the research of Armstrong, et al. （2015） and Li, et al. （2016）, and help to evaluate the consequences of party organizations’ participation in governance more comprehensively and objectively. Third, it enriches the literature on the relationship between corporate governance mechanisms and tax avoidance activities from the perspective of political governance.

Corporate governance, incentives, and tax avoidance

We examine the link between corporate governance, managerial incentives, and corporate tax avoidance. Similar to other investment opportunities that involve risky expected cash flows, unresolved agency problems may lead managers to engage in more or less corporate tax avoidance than shareholders would otherwise prefer. Consistent with the mixed results reported in prior studies, we find no relation between various corporate governance mechanisms and tax avoidance at the conditional mean and median of the tax avoidance distribution. However, using quantile regression, we find a positive relation between board independence and financial sophistication for low levels of tax avoidance, but a negative relation for high levels of tax avoidance. These results indicate that these governance attributes have a stronger relation with more extreme levels of tax avoidance, which are more likely to be symptomatic of over- and under-investment by managers.

Corporate social responsibility and tax avoidance: A comment and reflection

This study shows that the phenomenon arising from low governance practices is identified as one of the causes of the global financial crisis and corporate financial scandals that have an effect on the increase of tax avoidance. In addition, research in Indonesia that examines tax avoidance information by taking into account corporate governance mechanisms is still less consistent and is such a new perspective that it becomes a main consideration for this study. Likewise, the calculation using the Avoidance Tax Rate proxy developed in this study was conducted to test how much tax avoidance has been done by companies. The population for this study was taken from the manufacturing industries listed on the Indonesia Stock Exchange from 2015-2019 assumed to have conducted tax avoidance. The total samples of 87 companies were selected by following a purposive sampling procedure. The statistical analysis using multiple regression shows that the board of commissioners had a significant negative effect on tax avoidance; while, Independent commissioners had a significantly negative effect on tax avoidance and institutional ownership on tax avoidance. This study indicates that the interactive effect of corporate governance and tax avoidance is the better and optimal corporate governance as a control mechanism and the balancing power. The lower the company does tax avoidance, the lower corporate governance mechanism will make it easier for companies to take tax avoidance actions. DOI: https://doi.org/10.26905/jkdp.v25i1.5043

Corporate environmental information disclosure and tax avoidance: Evidence from China

기업의 재무적 특성과 조세회피 관련성에 관한 기존의 연구들은 실질적으로 조세회피 결정요인에 관한 재무적 특성에 관하여 연구하여 왔으며, 조세회피 수준에 따른 재무적 특정변수를 예측한 연구는 없었다. 만약 기업의 조세회피 수준에 따른 유의적인 재무적 특성변수를 찾아낼 수 있다면 사전적으로 적정기업과 비적정기업간 재무적 특성비율 차이를 확인하여 기업의 부실예측에 유용한 지표로 활용할 수 있다. 즉, 재무제표를 활용한 재무비율(Financial Ratio)은 기업의 미래의 가치평가, 신용평가, 대출심사기준 등 다양한 의사결정의 기초자료로 활용할 수 있기 때문에 재무비율을 통한 조세회피 수준 예측은 비적정기업의 부실예측에 추가적인 하나의 지표로서 활용할 수 있기 때문에 본 연구에서는 조세회피에 유의적인 영향을 미치는 재무비율을 통한 조세회피 수준예측에 관하여 판별분석을 통해 알아보고자 한다. 본 연구는 기업의 정보가치를 가장 쉽게 제공해주는 재무비율을 이용하여 기업들의 조세회피수준 예측을 해 보고자 조세회피 수준이 높은 집단과 낮은 집단을 구분하였다. 기업의 조세회피수준이 높은 집단과 낮은 집단으로 구분한 후 재무적 특성을 나타내주는 재무비율을 대상으로 판별분석을 다음과 같이 수행한다. 조세회피 수준 예측은 전체표본을 두 집단(판별함수 추정시 사용할 집단 (집단1)과 추정된 판별함수를 통해 조세회피 수준 예측치와 실제치를 비교할 집단 (집단2))으로 구분하여 (1) 집단1을 이용해 판별분석을 통한 조세회피 수준 예측치에 영향을 미치는 재무비율변수와 판별계수를 찾아내고, (2) 집단1을 이용해 (1)을 통해 확인된 판별함수를 집단2에 적용하여 조세회피 수준 예측치를 산출한 후 집단2의 실제 조세회피 수준 예측치의 값과 비교함으로써 어느 정도 예측정확성을 가지는지를 살펴보고자 한다. BTD는 이익조정행위인 재무보고이익의 증가나 또는 조세회피행위인 세무이익의 감소를 나타내는 대용치로 활용할 수 있기 때문에 조세회피수준 예측을 이용한 재무비율분석은 적정기업과 비적정기업으로 구분하여 파산예측에 이용될 추가적인 하나의 지표로서 활용할 수 있을 것으로 기대된다. 판별분석의 결과 20개의 재무적 특성변수 중 다단계측정방식으로 구하여진 대표 재무적 특성변수는 재고자산대유동자산(IACA), 현금구성비율(CSR), 순이익대총부채(NPTD), 노동장비율(LER)로 나타났다. 집단1을 통하여 선별된 재무적 특성변수의 예측치가 78%전후로 예측정확성이 높은 것 을 알 수 있으며, 이렇게 추정된 재무적 특성변수를 집단2에 대입해 본결과 89%의 높은 예측정확성을 나타내는 것을 알 수 있다. 본 연구는 신용기관, 채권자 및 투자자 등 회계정보 이용자들에게 중요한 의미를 갖는 재무제표를 중심으로 조세회피 수준 예측을 이용한 재무비율분석은 적정기업과 비적정기업으로 구분하여 부실예측에 이용될 추가적인 하나의 지표로서 활용할 수 있을 것으로 기대된다. 기존의 선행연구와는 달리 재무비율을 통한 조세회피 수준 예측이 실제 기업의 조세회피 수준이 유의한 재무적특성을 판별해 내어 비적정기업의 부실예측에 활용될 수 있음을 알 수 있다.Previous studies on tax avoidance delve into the financial characteristics of firms that conducting tax avoidance, yet studies predicting the level of tax avoidance with financial characteristics are scarce. Financial ratios can be used as a source of information for various decisions including valuation of firm, credit assessment, and screening for lending decision, and which can be employed as a useful indicator of firm insolvency. The methodology is summarized as follows: first, firms are categorized into high tax avoidance firms and low tax avoidance firms. We predict tax avoidance by dividing the total sample into two groups; the first group is used to estimate the discriminant function, and this function is used in the second group to estimate corporate tax avoidance, which is then compared to actual tax avoidance. In other words, we find the discriminant coefficients and significant financial ratios that influence corporate tax avoidance from the first group, then we use these values to estimate corporate tax avoidance in firms of the other groups. This estimated tax avoidance and actual tax avoidance are compared to measure the accuracy of the prediction of discriminant analysis result. The results demonstrate that among financial characteristics, Inventory Assets to Current Assets (IACA), the Cash Structure ratio (CSR), Net Profit to Total Debt (NPTD), and the Labor Equiptment Ratio (LER) are found significant from our multi-step estimation method. Estimation using the selected financial characteristics can accurately forecast tax avoidance about 78% in the first group. When we implement the same variables in the second group, the predictions yield a substantially accurate prediction rate of 89%. This study contributes to the literature by proposing an additional index to predict tax avoidance, the insolvency of a firm. We examine the difference in financial characteristic ratios between firms with levels of corporate tax avoidance to predict future corporate tax avoidance through a discriminant analysis.

ABSTRACTIn recent years, academic researchers, policymakers, and the public have increasingly focused on the tax avoidance behavior of corporations. At the same time, firms are increasingly pressured to incorporate corporate social responsibility (CSR) into their decision making, leading to heightened academic interest in CSR. Given that opponents of corporate tax avoidance often argue that avoiding tax is socially irresponsible, we review the growing literature surrounding this issue. We begin with a theoretical review of how corporate tax avoidance fits into the CSR framework. We then review the empirical evidence on the interrelationship between CSR and firm reputation in the tax avoidance literature. We frame our review around three questions: (i) Do firms view tax avoidance as a CSR issue? (ii) Do stakeholders view tax avoidance as socially irresponsible, leading to reputational costs of tax avoidance? And (iii) Do firms change their tax avoidance behavior due to fear of these reputational consequences? Throughout our review, we provide discussions on the state of the current literature and offer suggestions for future research opportunities.

In recent years, academic researchers, policymakers, and the public have increasingly focused on the tax avoidance behavior of corporations. At the same time, firms are increasingly pressured to incorporate corporate social responsibility (CSR) into their decision making, leading to heightened academic interest in CSR. Given that opponents of corporate tax avoidance often argue that avoiding tax is socially irresponsible, we review the growing literature surrounding this issue. We begin with a theoretical review of how corporate tax avoidance fits into the CSR framework. We then review the empirical evidence on the interrelationship between CSR and firm reputation in the tax avoidance literature. We frame our review around three questions: (1) do firms view tax avoidance as a CSR issue? (2) do stakeholders view tax avoidance as socially irresponsible, leading to reputational costs of tax avoidance? and (3) do firms change their tax avoidance behavior due to fear of these reputational consequences? Throughout our review, we provide discussions on the state of the current literature and offer suggestions for future research opportunities.

This study analyzed the two-way connection between corporate social responsibility (CSR) and tax avoidance and examined how audit quality moderated the relationship. The previous study by Hajawiyah et al. (2022) examines the bidirectional effect of CSR and tax avoidance but with different moderating variables, which is risk management. Samples of this study were companies listed on the Indonesia Stock Exchange (IDX) from 2018 to 2020. A simultaneous test and a two-stage least squares (2SLS) regression were employed in data analysis. The results showed that audit quality did not moderate the relationship between corporate social responsibility and tax avoidance. It was also revealed that tax avoidance had no effect on corporate social responsibility and audit quality could not decrease the influence of tax avoidance on corporate social responsibility. This study also found no correlation between corporate social responsibility and tax avoidance. This study contributes to the current body of literature on tax avoidance and corporate social responsibility. Previous studies only measured a one-way correlation between tax avoidance and corporate social responsibility, while this study examined the two-way interaction and the role of audit quality in the correlation between corporate social responsibility and tax avoidance. The findings of this study can be used as a reference for company management in formulating plans and strategies related to corporate social responsibility and tax avoidance.

This study investigates the impact of corporate governance practices (namely board characteristics, ownership structure, and audit committee characteristics) on corporate tax avoidance. For this purpose, this study uses generalised least squares regression on a sample of 138 companies listed on the Pakistan Stock Exchange. Ten-year data from 2009 to 2018 are collected from published annual reports, comprising 1380 firm-year observations. The findings highlight that board independence, concentrated ownership, and audit committee gender diversity are negatively associated with tax avoidance. Conversely, managerial ownership and audit committee independence positively influence aggressive tax behaviour. Additional analysis reveals that these impacts are nonlinear and change with the different levels of tax avoidance. Enhanced governance stifles tax avoidance at lower levels; however, it encourages tax avoidance when firms are already aggressively avoiding taxes. This scenario represents a ‘double down’ behaviour depicted by the Pakistani corporate sector. This is one of the foremost studies to explore the impact of corporate governance on tax avoidance in Pakistan. It contributes to the literature by examining the impact of under-researched factors such as board meetings and audit committee characteristics and provides insights into the conflicting findings on board characteristics and ownership structure.

Prior literature suggests that firms may bear reputational costs associated with corporate tax avoidance, which could in turn reduce the net present value of firms’ tax planning strategies. Other research indicates that investors perceive corporate social responsibility (CSR) activities and tax avoidance as inconsistent with each other when engaged in concurrently. However, these studies do not consider the fact that firms may have opportunities to avoid tax in socially responsible ways. We investigate the equity valuation implications of one form of socially responsible tax avoidance: claiming the renewable electricity production tax credit (PTC). We predict and find that investors more positively value tax savings generated from PTCs compared to other forms of corporate tax avoidance. Additionally, consistent with the role that CSR can play in enhancing a firm’s reputational capital, we find evidence of a spillover effect in which investors more positively value other sources of tax avoidance to the extent the firm also reduces its taxes in a socially responsible way.

This thesis consists of three separate chapters that explore issues at the intersection of taxation and financial accounting. The unifying theme is corporate tax avoidance and the consequences of increased transparency of tax practices on firm behaviour and financial reporting. Chapter 1 (co-authored with Chris Evans and Youngdeok Lim) examines the impact of changes to a full dividend imputation system on corporate tax avoidance. We exploit an exogenous shock to the Australian dividend imputation system which became effective on 1 July 2000 and allows shareholders to claim all imputation credits attached to dividends, even if it propels them into a tax refund position. This enhancement to shareholder’s after-tax positions likely provides stronger incentives for firms to minimise tax avoidance activities to generate valuable imputation credits for distribution to shareholders. We implement a difference-in-differences research design to examine the impact of the legislative change on tax avoidance for a variety of treatment and control groups after the change. Consistent with our expectations, we find evidence of an increase in cash effective tax rates (decrease in tax avoidance) for domestic dividend-paying firms relative to domestic non-dividend-paying firms. This finding is even more pronounced for firms paying fully-franked dividends, and the decreases in tax avoidance are economically significant. Our results are consistent with the notion that firms undertake less tax avoidance in the post 1 July 2000 period given the presence of stronger incentives for them to pay corporate tax. In Chapter 2 (solo-authored), I exploit the availability of new data to examine the impact of mandatory public country-by-country disclosures on the tax aggressiveness of European Union (EU) banks. In response to growing public and political backlash against tax avoidance, the European Parliament introduced new rules in 2013 requiring the public disclosure, on a country-by-country basis, of certain tax-related information by credit and investment firms operating in the EU. Enhanced transparency via public country-by-country-reporting (CBCR) allows greater scrutiny by stakeholders and is considered one way of increasing pressure on EU banks to pay corporate taxes that reflect their true economic presence in each country they operate in. I conduct a range of empirical tests using cash and book effective tax rates to proxy for tax avoidance and based on a hand-collected sample of 72 banks, I do not find any evidence of a reduction in tax avoidance in response to increased transparency. A similar result is found when a differences-in-differences research design is employed to test for any change in tax avoidance of EU banks relative to a control group of 39 multinational EU insurers exempt from CBCR rules. In fact, in some tests, I find that, on average, EU banks increased their tax avoidance relative to EU insurers despite increased disclosure levels. I also find that tax haven use, calculated as the proportion of turnover, profit before tax, and subsidiaries/branches disclosed in tax havens, remains largely unchanged despite increased transparency. The results suggest that mandatory public CBCR has not altered the cost-benefit equilibrium of tax avoidance sufficiently to encourage EU banks to curtail their tax avoidance practices. Chapter 3 (co-authored with Bjorn Jorgensen and Peter Pope) investigates the interplay between mandatory public CBCR, geographic segment reporting, and tax haven use. We examine whether the availability of country-level financial information impacts geographic segment reporting and the extent to which firms aggregate geographic segments. Based on a hand-collected sample of 70 banks operating in the EU, we document the location of their operations and the extent to which they operate in tax havens. We find that, on average, banks with tax haven operations enjoy significantly higher profit margins, turnover per employee, and profit per employee, and lower book effective tax rates, in these jurisdictions relative to non-tax havens. Using a difference-in-differences research design, we find no significant change in the number of geographic segments, country segments, or line items per geographic segment, disclosed in segment reporting notes after the introduction of CBCR relative to a control sample of 39 multinational EU insurers exempt from CBCR. Furthermore, we find a positive association between tax haven intensity and geographic segment aggregation consistent with the notion that EU banks may aggregate geographic segments to obfuscate tax haven activities. This early empirical evidence suggests that mandatory public CBCR has limited impact on geographic segment reporting. In sum, the three chapters of this thesis contribute to the emerging literature on the determinants and consequences of corporate tax avoidance. The findings should inform global regulators and policy makers interested in the extent of corporate tax avoidance and especially, EU policy makers currently considering the extension of public CBCR to all industries.