Do SME Conduct Less Corporate Tax Avoidance?

Abstract

Small-and Medium-sized Enterprises (SME) benefit from the tax cut provisions and tax subsidies from SME support policies, and thus are considered to have less motivation to avoid taxes due to the lower tax burden than that of non-SME firms. This study empirically investigates the contrast in the motives for tax avoidance between SME and non-SME firms. Based on the sample consisting of 18,954 audited firms, 18,954 externally audited firms from 2011 to 2013, this study examines book-tax difference (BTD), the difference between accounting profits and taxable income, and estimated corporate tax avoidance (TS), which is the portion of BTD that cannot be explained by total accruals, as a proxy for tax avoidance. (Desai and Dharmapala 2006). The empirical findings are summarized as follows. First, SME hold less motivation for tax avoidance than non-SME firms, as shown by analogous results from both BTD and TS, which are the proxies for corporate tax avoidance. Second, the logistic analysis also demonstrates logistic analysis demonstrates consistent results which also contend that SME tend to hold less motivation for tax avoidance. We conclude that the consistent results can be explained by the smaller tax burden of SME from tax deduction and exemption clauses applied to SME. The present study investigates financial determinants that lead to tax avoidance in SME and empirically test the difference between SME and non-SME firms in tax avoidance. Throughout this study, we intend to propose policy implications for SME subsidies.