Nontax Country Characteristics and Tax Avoidance

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 level of tax avoidance is estimated based on the worldwide effective tax rate (ETR) of corporate groups. A sample of group years domiciled in 31 countries for the years 2008 to 2015 is used to test the association between culture and tax avoidance. 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. The study also suggests that policymakers consider cultural factors when setting anti-avoidance regulations for MNCs.