Costs Of Tax Avoidance Research Articles

Controlling Shareholders' Value and Corporate Tax Avoidance*

AbstractThis paper investigates whether and how controlling shareholders' value (i.e., the concentration of controlling shareholders' wealth within a business group) affects corporate tax planning using Korean chaebols. We find that firms with high controlling shareholders' value engage in a lower level of tax avoidance than other affiliates in the business group. We also find that controlling shareholders' concern about the costs of tax avoidance (i.e., regulatory penalties and reputational damages) are potential mechanisms that prevent firms with high controlling shareholders' value from aggressive tax planning. Lastly, we provide the value implication of tax avoidance for firms with high controlling shareholders' value.

Does tax avoidance impair accounting comparability?

PurposeThis paper examines the relationship between tax avoidance and accounting comparability. The authors argue that aggressive tax behavior impairs the comparability of financial statements by altering the accounting function, which maps economic events into accounting data.Design/methodology/approachThe empirical analysis is based on a large sample of United States (US) firms. The authors use raw and industry-adjusted effective tax rates (ETRs) to proxy tax avoidance. The authors use the measure of accounting comparability developed by De Franco et al. (2011), which aims to capture the similarity of the accounting function.FindingsThe authors find that firms with more aggressive tax avoidance strategies have substantially lower accounting comparability. The evidence also shows that the negative effect of tax avoidance on accounting comparability is driven by firms with aggressive tax planning strategies beyond the industry norm. Furthermore, using an alternative measure of accounting comparability as a function of pre-tax income, the authors continue to find evidence of the negative effect of tax avoidance behavior. Importantly, this provides evidence that the effect of aggressive tax planning is not limited to the reported tax expense, but affects the comparability of the overall financial reporting system.Originality/valueThe authors identify a new potential cost of tax aggressive activities, being the loss of accounting comparability as driven by tax aggressive activities. The results contribute to the literature on the costs of tax avoidance and on the determinants of accounting comparability.

Does corporate digital transformation affect the level of corporate tax avoidance? Empirical evidence from Chinese listed tourism companies

Based on the data of China's A-share listed tourism companies from 2019 to 2022, this paper empirically tests the impact and mechanism of digital transformation of tourism enterprises on tax avoidance. The results show that the digital transformation of tourism enterprises will significantly inhibit the tax avoidance of enterprises, and the digital transformation of enterprises inhibits tax evasion by improving the level of internal control. Therefore, the digital transformation of tourism can inhibit the aggressive tax avoidance behavior of managers seeking private interests through effective governance mechanisms, and make managers weigh the benefits and costs of tax avoidance, thus affecting the corporate tax avoidance strategy. This study expands the research in the fields of corporate digital transformation and corporate tax avoidance, and provides relevant enlightenment for promoting the deep integration of digital economy and real economy.

Voluntary vs. mandatory: the role of auditing in constraining corporate tax avoidance in small private firms

This paper examines whether the status of the financial statement audit, as either voluntary or mandatory, is related to the corporate tax avoidance behaviour of private firms. Using the Swedish audit regime shift in 2010 which removed mandatory audit requirements for small private companies, we find that voluntarily audited firms exhibit a 19% decrease in total income tax burden relative to firms subject to mandatory audit following the regulatory change. This decrease corresponds to an average SEK 15,000 (approximately 1,500 euros) lower tax payment and is driven primarily by increasing conforming tax avoidance. We also find that increasing tax avoidance in voluntarily audited firms occurs, at least partly, due to impaired auditor independence under the voluntary audit regime. Finally, we show that the non-tax costs of tax avoidance restrict these tax-driven reporting changes. Our findings contribute to the literature on auditors’ constraining effect on corporate tax avoidance as well as to the debate over the costs and benefits of a mandatory financial statement audit regime.

A Study on the Tax Avoidance Behavior and the Value of Family and Non-Family Firms: Focused on KOSDAQ Firms

Purpose The purpose of this paper is to examine tax avoidance and its effect on corporate value in a corporate governance framework: First, this paper has analyzed whether there exist different tax avoidance tendencies between family firms and non-family firms registered on the KOSDAQ market. Second, this paper has examined the effect of tax avoidance on corporate value and whether the extent of its impact differs between family and non-family firms. Design/Methodology/Approach Based on the current literature, this paper measures tax avoidance by a portion of the difference between financial reporting income and taxable income after adjusting the amount resulting from the profit adjusting activities for financial reporting purposes. To classify family and non-family firms, this study adopts the criteria widely used in previous studies. Two criteria are applied to classify family firms for the consistency of the study. To verify hypotheses, we perform the panel data analysis for reliable in-depth results. Findings This paper studies that family firms have lower tax avoidance tendencies than non-family firms. This result suggests that family firms do not actively participate in tax avoidance compared to non-family firms because the non-financial costs of tax avoidance are assumed to be larger for family firms than for non-family firms. According to our panel analyses, the negative impact of tax avoidance on the value of family firms is greater than that of non-family firms. This indicates that investors in capital markets recognize that the costs of tax avoidance exceed its benefits and the extent to which the costs outweigh the benefits is greater for family firms than for non-family firms. Research Implications In the management of tax strategies, by studying the relationship between tax avoidance and corporate value, we can understand the decision-making process related to tax avoidance based on the trade-off between the costs of tax avoidance and its benefits from the perspective of family vs. non-family businesses. This is our contribution to the current literature.

Tax Shelters, Reputational Costs and CEO Turnover: Evidence from Tax-Violating Enterprises in China

ABSTRACT This paper investigates whether executives will bear reputational costs as a result of using tax shelters within different ownership structures. Based on tax-violation events of Chinese listed firms, we find that CEOs in state-owned enterprises are more likely to bear reputational costs than CEOs in non-state-owned enterprises and that the penalty on executives always occurs in the current year rather than in the subsequent year. In addition, the individual reputational cost of tax avoidance is related to tax aggressiveness and regulatory punishment. The more severe the tax aggressiveness or the regulatory punishment is, the greater the reputational cost of tax avoidance is for CEOs in SOEs. Our findings not only provide direct empirical evidence for the research on the corporate reputational costs of tax avoidance in an agency framework, but they also have great significance for understanding “the Under-Sheltering Puzzle.”

Tax Planning Gone Awry: Do Tax-Motivated Firms Experience Worse Tax Outcomes from Losses Compared to Other Firms?

We study the tax outcomes associated with losses in publicly traded U.S. multinational firms. We find that tax planning using tax haven operations, which is commonly associated with relatively favorable tax outcomes for profitable firms, is associated with poor tax outcomes from losses compared to multinational firms that do not tax plan with tax haven operations. Specifically, we find that firms with tax haven operations receive significantly lower tax loss benefits in terms of both tax loss carrybacks and tax loss carryforwards. We demonstrate the striking asymmetry of the tax U.S. system, in which U.S. multinational firms are often unable to fully realize tax benefits for their losses despite provisions for tax loss carrybacks and carryforwards, and show that tax planning exacerbates this asymmetry. In addition, we note that our findings highlight a potential cost of tax avoidance: lower tax benefits from losses. We also contribute to the tax avoidance literature by providing a research design framework for studying tax outcomes during loss years.

Do Some Multinational Firms Benefit from Competitive Tax Advantages in Europe? Evidence from Stock Price Reactions to EU State Aid Investigations

This research examines spillover effects of tax avoidance on peers’ firm value using the setting of the European Commission’s state aid investigations of private letter rulings. We assume that news about a firm’s tax avoidance strategies also reveals information about peers’ tax avoidance because investors expect similar firms to use similar strategies. Based on an event study design, we show that news about potential costs of tax avoidance of targeted U.S. multinational firms leads to negative stock price reactions among their peers. Moreover, peers’ investors adjust their evaluations upwards for news in favor of the targeted firms. Consistent with the level of tax avoidance being indicative of having similar strategies, spillover effects are stronger for firms with the highest levels of tax avoidance when examining a broad set of peers. Our findings suggest the need for a more comprehensive understanding of the costs and benefits of tax avoidance.

Cost of Tax Avoidance: Examining the Role of Product Market Structure

Examining product market structure, we show that market leaders engage in greater levels of all forms of tax planning and generate more sustainable tax positions. Importantly, examining cost of equity capital we document asymmetrical benefits to tax avoidance for market leaders in that while they participate in benefits to tax optimization, unlike the case for non-leader firms, they are shielded from additional risk premiums required for more aggressive levels and forms of tax avoidance. Realized tax risk, however, has economically meaningful effect on investors’ perception of overall firm risk regardless of market power. Moreover, we confirm the findings in Cook et al. (2015) that at low/(high) levels of tax avoidance investors outweigh benefits/(incremental risks) of tax optimization/(avoidance). Overall, our analysis validate arguments that there exists negligible ex-ante costs to tax avoidance particularly for firms with significant market power. These results are robust to linear vs non-linear modelling assumptions, returns-based models, post-FAS109 period estimates and to measures of income mobility, financial constraints and corporate governance.

Credit Default Swaps and Borrower Tax Avoidance

This study investigates the effect of the debtor-creditor relationship on firms’ tax planning decisions. We explore the introduction of credit default swaps as a shock to the debtor-creditor relationship that potentially reduces the non-tax costs of tax avoidance, thus increasing the level of tax avoidance. Using a differences-in-differences regression, we find that borrowing firms significantly increase their level of tax avoidance when there are credit default swaps trading on their debts. This effect is more pronounced when the top managers’ compensation schemes are structured to be better aligned with risk-chasing shareholders, when managers are more insulated from takeover pressures, and when the outstanding shares of borrowing firms are more intensively held by institutional investors. Our findings are robust to various measures of tax avoidance and alternative research designs.