Abstract
This paper investigates the association between the Big 4 accountancy firms and the extent to which multinational enterprises build, manage and maintain their networks of tax haven subsidiaries. We extend internalisation theory and derive a number of hypotheses that are tested using count models on firm-level data. Our key findings demonstrate that there is a strong correlation and causal link between the size of an MNE’s tax haven network and their use of the Big 4. We therefore argue that public policy related to the role of auditors can have a significant impact on the tax avoidance behaviour of MNEs.
Highlights
Given the impact that the recent financial crisis of 2008 has had on the public finances of developed economies, the use of tax avoidance measures by multinational enterprises (MNEs) has come under increasing scrutiny from various governments and civil society organisations across the world
As well as simple correlation, we present evidence suggestive of causation, which is based on results demonstrating that MNEs which take on a Big 4 accountancy firm subsequently increase the size of their tax haven networks, relative to those firms which do not take on a Big 4 accountancy firm
Highlighting the magnitude of this relationship, our results indicate that MNEs that utilise one of the Big 4 as their auditor, holding everything else constant, have an incidence rate of tax haven use 1.12-1.14 times higher compared to those MNEs that do not use one of the Big 4 accountancy firms as their auditor
Summary
Given the impact that the recent financial crisis of 2008 has had on the public finances of developed economies, the use of tax avoidance measures by multinational enterprises (MNEs) has come under increasing scrutiny from various governments and civil society organisations across the world High profile cases, such as the tax affairs of Amazon, Facebook and Google have received widespread media attention. The leaked Panama Papers of 2016 revealed the details of thousands of anonymously owned companies across multiple justifications. These included apparent PwC entities based in jurisdictions known as tax havens, including for example the Cayman Islands, Gibraltar, Luxembourg and Mauritius. Apparent KPMG entities were found based in Guernsey, Hong Kong, Jersey and Switzerland. In regards to the Big 4′s role in the overall tax strategy of MNEs, it is the earlier ‘LuxLeaks’ of November
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