National Culture and Tax Avoidance of Multinational Corporations

Ji Seon Yoo,Ye Ji Lee

doi:10.3390/su11246946

Abstract

This study tests the role of national culture in tax avoidance by multinational corporations (MNCs). Hofstede’s four cultural dimensions are used to measure cultural differences across countries: uncertainty avoidance, individualism, masculinity, and power distance. The empirical results of the study imply that MNCs headquartered in countries with low uncertainty avoidance, low individualism, high masculinity, and low power distance engage in a higher level of tax avoidance than MNCs in countries with high uncertainty avoidance, high individualism, low masculinity, and high power distance. In addition, the cultural features of the parent company generally have a stronger influence on group-level tax avoidance than those of its subsidiaries. This study contributes to the literature by presenting empirical evidence of culture as a determinant of tax avoidance by MNCs.

Highlights

Despite the general consensus that culture is an integral determinant of behaviors of individuals and organizations, culture has received little attention from researchers because of difficulty in designing testable hypotheses (Guiso et al [1])
Since countries with high power distance index (PDI) scores tend to be less sensitive to fairness, accept a hierarchical order, and require no further justification for inequalities of power, the results indicate that multinational corporations (MNCs) in countries that are less sensitive to fairness engage in tax avoidance to a lesser extent than those in countries where individuals are highly sensitive to fairness
This study examines whether and to what extent national culture is associated with the level of MNCs’ tax avoidance

Summary

Introduction

Despite the general consensus that culture is an integral determinant of behaviors of individuals and organizations, culture has received little attention from researchers because of difficulty in designing testable hypotheses (Guiso et al [1]). In the field of tax accounting, a few studies identify that national culture influence tax avoidance of individuals and firms (Tsakumis et al [6]; Richardson [7]; Richardson [8]; Bame-Aldred et al [9]). Because tax avoidance of MNCs impede fair competition of corporations, understanding the nature and determinants of tax avoidance of MNCs is critical to pursuing sustainable economic growth. MNCs operate affiliates in more than one tax jurisdiction that their tax-avoidance behaviors are affected by different national culture. In this respect, culture can be an influential nontax determinant for tax avoidance of MNCs, compared to that of individuals or firms. Richardson [7] finds that non-economic factors, such as the complexity of the tax system, education, income source, fairness and tax morale are key determinants of tax evasion

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