Extent of corporate tax evasion when taxable earnings and accounting earnings coincide

Abstract

PurposeThe purpose of this paper is to examine the extent of corporate tax evasion and its implications on the protection of the shareholders and on the function of the capital market.Design/methodology/approachThe extent of tax evasion of the Greek public companies is estimated on the basis of tax audit data. Unvariate tests are employed in order to assess the effect of the audit firm and to examine corporate tax behaviour.FindingsThe mean rate of tax evasion was estimated at about 16 per cent, showing that the incentive for tax evasion doesn't diminish when the companies are listed in the stock exchange. Specifically, the companies alter their tax behaviour (i.e. appear more tax compliant) only in the year of the IPO and the year before. It was also found out that the type of the audit firm is likely to affect the extent of tax evasion committed.Practical implicationsThe present paper provides evidence that corporate tax evasion is widespread and calls for appropriate measures. Nowadays, this issue has become more crucial than ever, as Greece is in the middle of the financial crisis. Moreover, the findings regarding audit effectiveness in detecting tax evasion have significant implications, as the 2010 Greek tax bill grants the audit firms the right to issue certificates for tax purposes.Originality/valueThis paper contributes to the literature of fraudulent financial reporting by focusing on one specific form of fraud, which has been widely neglected – tax evasion.