Tax Enforcement Research Articles

The impact of the organisational structure of tax authorities on tax and accounting fraud

AbstractUsing tax centralisation reform enacted to eliminate decentralised tax authorities, we find firms have lower probabilities of tax and accounting fraud since its implementation. Our analysis shows the negative impact of the reform on tax and accounting fraud becomes stronger among firms with weaker tax enforcement, indicating that the reform plays a corporate governance role through strengthening tax enforcement. Additionally, we find this effect is stronger when firm‐level governance is weaker and stronger in firms with higher agency costs. Finally, the reform effect is weaker among non‐state‐owned enterprises with political connections to the central government.

The role of tax enforcement on green innovation: Evidence from the consolidation of state and local tax bureau (CSLTB)

Literature on environmental governance in developing countries often attributes environmental issues to the sub-national governments’ lenient enforcement of the law. Based on the data of A-share listed companies spanning from 2010 to 2020, this study conducts a difference-in-differences estimation exploiting an exogenous shock in tax enforcement caused by the Consolidation of State and Local Tax Bureau (CSLTB) in China. We identify strong evidence that the CSLTB decreases corporate green innovation, which is consistent across a range of robustness checks. Mechanistic tests show our primary discoveries are motivated by the liquidity constraint channel, which is manifested by an improvement in firms’ effective tax rate, cash holdings, and a decrease in dividend payments. Finally, our study reveals this negative effect exerted by tax enforcement with respect to corporate green innovation becomes particularly pronounced among firms with strong financing constraints, poor profitability, strong legal environment, non-state-owned firms, and poor tax transfer capability. Overall, this study enriches the study of tax enforcement and provides further insight into the environmental effects of non-environmental policies.

TAX ENFORCEMENT STRATEGY: THE ANTIDOTE TO NON-TAX COMPLIANCE IN NORTH-WEST NIGERIA

Voluntary SME tax compliance has been of great interest to governments all over the world, given their unimpressive contribution to total tax revenue. This is even more so in Nigeria where the culture of tax compliance among SMEs can be described as poor, requiring innovative enforcement strategies. This study examined the extent to which tax enforcement strategies served as antidote to non-tax compliance in the North-West Nigeria. The study collected quantitative data from 345 randomly and purposively selected SMEs owners duly registered in North-west, Nigeria. The data was subjected to both descriptive and inferential analysis through techniques of central tendency and multiple regressions. Results revealed that three tax enforcement strategies: Use of tax clearance certificate (β=0.024 < 0.003), grant of tax amnesty (β=0.025< 0.020), and imposition of tax penalty (β = 0.013 < 0.014) have significant positive influence on degree of tax compliance among SMEs in the North-West Nigeria. Given the significant statistical evidence, this research inferred and concluded that deployment of both punitive (tax penalty) and persuasive measures (tax clearance certificate and tax amnesty) serve as antidote to non-tax compliance among the SMEs in the North-West, Nigeria. The study shows that tax compliance across informal sectors can be enhanced beyond the use of legal means. In essence, governments have the leverage of achieving increase in tax revenue in the informal sector through multiple strategies of motivation and punishment as implicitly emphasized in the theory of tax morale and deterrence theory.

Minority shareholders and tax avoidance

This paper examines whether and how external country-level corporate governance devices affect corporate tax avoidance. Using a panel of public firms across 33 countries, I show that laws empowering minority shareholders hinder corporate tax avoidance, consistent with shareholder protection laws spilling over to tax avoidance through reduced income diversion. I corroborate the validity of these findings using a major corporate governance reform in Italy. In cross-sectional tests, I further document that firms in countries with stricter transfer pricing rules and stronger tax enforcement reduce tax avoidance to a larger extent. Finally, through path analysis, I provide evidence consistent with firms shifting less income to foreign countries in response to stronger minority shareholder rights. Overall, these findings suggest that minority shareholder protection laws can safeguard outside investors and the government against expropriation by insiders.

Does it pay to be green? The impact of emissions reduction on corporate tax burden

Is there any benefit to reducing emissions for firms? Based on the China Industrial Enterprises Emission and Pollution Database and the Annual Survey of Industrial Firms, this study investigates the impact of firms’ emissions reduction on their tax burden. We find strong and consistent evidence of a significant reduction in the tax burden following a reduction of firms polluting emissions. This effect mainly manifests in large-scale firms, firms whose taxes are collected by the local taxation bureaus (LTB), and firms in regions with stricter environmental regulations. We also find that tax breaks and government subsidies are important pathways to reduce corporate tax burden. Further exploration documents that firms’ bargaining power and local tax enforcement have significantly moderating effects on the relationship between firms’ emissions reduction and their tax burden.

Down a Slippery Slope: Lack of Trust, Coercive Threats and Business Tax Resistance in Greece, 1955–1988

Over the second half of the 20th century, Greek governments failed to tax business income in line with the country’s level of economic development. This paper uses the “slippery slope” model of tax compliance to explain why the reform of income and corporate taxation in the late 1950s met strong resistance in the business sector. We argue that the negative legacy of interwar reforms, the lack of sustained and credible investment in trust building in coincidence with the postwar reforms, and the intensification of coercive threats in tax enforcement led to an antagonistic tax climate and a degradation of enforced and voluntary compliance. Our qualitative analysis based on original primary sources shows that the arguments publicly voiced by entrepreneurs and their organizations reflected their persistent perception of tax power as unfair, arbitrary and extractive. Using aggregate tax returns data, our quantitative analysis finds evidence of systematic and increasing income underreporting both by unincorporated and incorporated businesses. This vicious circle of non-cooperation and mutual distrust explains why governments got trapped into a persistent low tax capacity equilibrium that still casts a shadow on the Greek economy.

Does digital tax enforcement drive corporate digitalization? Evidence from the Golden Tax Project III in China: A pre-registered report

This pre-registered study tries to explore the interaction between the tax enforcement and corporate behavior based on a digital perspective. We are going to investigate three questions in this study: 1) whether the tax enforcement digitalization will drive firms to improve their digitalization? 2) if it does, what is the underlying mechanism? 3) what is the impact of the policy-driven digitalization on firms' productivity? To explore these questions and mitigate the endogenous problems, we utilize the “Golden Tax Project III” in China as the quasi-natural experiment to conduct a difference-in-difference (DID) analysis. This study expands the research on the economic consequences of tax enforcement and provides a new perspective for promoting high-quality economic development through the synchronized progress of digital government and digital economy.

The environmental benefit of tax enforcement: evidence from China

ABSTRACT This study explores how tax enforcement contributes to the improvement of air quality. We leverage the implementation of the Golden Tax Project III in China as a quasi-natural experiment and employ a difference-in-differences framework to establish causality. The findings indicate that the average SO2 concentration in pilot cities decreased by 2.8%, and the average PM2.5 concentration decreased by 3.2%. Further analysis reveals that curbing the expansion of tax-evading firms and ensuring the government’s provision of environmental public goods are mechanisms through which stricter tax enforcement reduces air pollution. These effects are more prominent in cities characterized by a higher proportion of heavy-polluting industries, greater fiscal pressure, and a stronger preference for environmental governance.

The State Capacity Ceiling on Tax Rates: Evidence From Randomized Tax Abatements in the DRC

This paper investigates how tax rates and tax enforcement jointly impact fiscal capacity in low‐income countries. We study a policy experiment in the D.R. Congo that randomly assigned 38,028 property owners to the status quo tax rate or to a rate reduction. This variation in tax liabilities reveals that the status quo rate lies above the revenue‐maximizing tax rate (RMTR). Reducing rates by about one‐third would maximize government revenue by increasing tax compliance. We then exploit two sources of variation in enforcement—randomized enforcement letters and random assignment of tax collectors—to show that the RMTR increases with enforcement. Including an enforcement message on tax letters or replacing tax collectors in the bottom quartile of enforcement capacity with average collectors would raise the RMTR by about 40%. Tax rates and enforcement are thus complementary levers. Jointly optimizing tax rates and enforcement would lead to 10% higher revenue gains than optimizing them independently. These findings provide experimental evidence that low government enforcement capacity sets a binding ceiling on the revenue‐maximizing tax rate in some developing countries, thereby demonstrating the value of increasing tax rates in tandem with enforcement to expand fiscal capacity.

Tax Enforcement at the Intersection of Social Welfare and Vulnerable Populations

Tax Enforcement at the Intersection of Social Welfare and Vulnerable Populations

ФОРМУЛЬНОЕ РАСПРЕДЕЛЕНИЕ: ВОПРОСЫ ТЕОРИИ

The current international tax system, which is based on separate accounting for corporate affiliates trading at arm’s length prices, is increasingly viewed as prone to abuse. Multinational enterprises have become adept at manipulating the rules of the current system to shift profits from high-tax to low-tax (or no-tax) jurisdictions. At the same time, each country’s law sets corporate income tax rates as well as bases, which may be eroded by tax incentives provided via legislation or ministerial discretion. These laws are further overlaid by a network of bilateral tax treaties, which alter the tax treatment of investment depending on the particular source and residence countries involved. This makes administration and enforcement of the corporate income tax costly, especially for developing country governments. Corporate compliance costs also increase with complexity. One fundamental reform proposal is to replace the current system of separate accounting by formulary apportionment.

Metals Streaming and Royalty Financing: A Framework for Assessing Mining Sector Financial Benefit–Sharing Implications for Governments

This chapter offers a simplified approach to assessing the potential impact of metals streaming and royalty financing on government revenues. Subject to the availability and quality of information, a revenue impact ratio can be determined by comparing the potential revenues to the government from more traditional forms of financing with potential revenues to the government from metals streaming or royalty financing.The chapter considers the key features, advantages, and disadvantages of these alternative funding options for mining projects, and then develops an illustrative model to demonstrate their potential impact on government revenues. This forms the basis on which to identify the key challenges, and the policy considerations when addressing them.While metals streaming provides upfront capital and a potential hedge against price risk for producers, it could also limit the upside potential for both the mining company and the host government. On the other hand, royalty financing offers stable income streams and diversification opportunities for investors but may lack direct exposure to metal price increases.The ultimate risk faced by resource-rich governments as a result of an increase in the use of metals streaming and royalty financing arrangements is a suboptimal share of the potential benefits that will accrue from the mining operations. Specifically, the risk is of a reduction in taxable income and royalty revenue.At the heart of the policy considerations pertaining to resolving these challenges and risks is reducing information asymmetry between the government, the mining company and the streaming or royalty company. One important way to do this is to strengthen tax legislation and enforcement mechanisms. Implementing anti-avoidance rules, such as interest limitation rules, can limit the ability of metals streaming and royalty financing companies to exploit tax and other loopholes. Other features with which to strengthen the legislation include clear minerals pricing rules, and clearer provisions regarding withholding taxes.

The Effect of Tax Enforcement on Corporate Digital Transformation: Evidence From the Implementation of Tax Administration Information System in China

The Effect of Tax Enforcement on Corporate Digital Transformation: Evidence From the Implementation of Tax Administration Information System in China

Residential Rental Tax Enforcement and Revenue Collection by Kenya Revenue Authority

Residential Rental Tax Enforcement and Revenue Collection by Kenya Revenue Authority

LEGAL AND TECHNICAL PROBLEMS OF DIGITISING THE MOROCCAN TAX SYSTEM

Most of the economic, social and environmental reforms envisaged by countries attach crucial importance to the information revolution, which has become the major challenge of our time. Most nations are embracing it wholeheartedly, including Morocco, which has introduced a new tax reform plan with the enactment of Framework Law 19.69. This plan focuses on digitising and strengthening administrative services by relying on electronic media, which have become a pressing necessity in all Moroccan administrations. Electronic filing and electronic enforcement of all taxes are the main objective of the tax services. The 2020 pandemic has played a fundamental role in accelerating the adoption of digitisation, offering an alternative to physical interactions in various locations such as administrative departments, public institutions, markets, and others. However, this development has raised a number of tax and legal issues, particularly in terms of the technology used for electronic tax filing and payment. These changes have also had an impact on the worlds tax systems, some of which are unable to keep pace with these advances. In addition, the emergence of e-commerce has added further complexity, particularly in terms of taxation and the challenges faced with social influencers generating significant revenues. Thus, the increasing adoption of electronic means in the tax field has raised legal and technical issues related to electronic tax filing and enforcement, just as e-commerce has become a major pillar of the global economic fabric, creating its own legal and technical challenges.

The political economy of inequality, mobility and redistribution

How does the interaction between inequality and social mobility affect the choice of fiscal policy? I analyze this question in a model of democratic politics with imperfect tax enforcement, where the ability of individuals to evade taxes limits the amount of redistribution in the economy. Social mobility creates an insurance motive that increases voluntary compliance, favoring the tax enforcement process. In such an environment, redistributive pressures brought about by an increase in inequality are only implementable in highly mobile societies. On the contrary, when mobility is low, higher inequality reduces tax rates and does not translate into higher redistribution. Descriptive evidence based on a sample of 71 countries for the period 1980–2015 shows correlations among inequality, mobility and redistribution in line with the predictions of the model.

Does audit regulation improve corporate decision making? Evidence from the disclosure of tax‐related key audit matters

AbstractOur study examines changes in corporate cash tax savings around the disclosure of tax‐related key audit matters (tax KAMs). We expect publicly disclosed tax KAMs to increase the visibility of a firm's tax complexity and uncertainty, thereby motivating the firm to improve its tax function. In turn, we expect to observe increased cash tax savings as an outcome of improvements to corporate tax functions. As predicted, we document that firms exhibit lower cash effective tax rates in the period after their auditors disclose tax KAMs. Additional tests suggest that disclosure of tax KAMs does not increase the likelihood of firms being aggressive in cash tax planning and increased cash tax savings are primarily driven by firms that adjust toward their optimal levels of cash tax savings. Cross‐sectional analyses support our expectation that post‐disclosure increases in cash tax savings are less pronounced when investors were better informed about firms’ tax strategies in the pre‐disclosure period and when firms faced stronger tax enforcement in the pre‐disclosure period. Collectively, our results highlight the role of KAM disclosure requirements in prompting firms to improve their internal operational decisions.

Effect of Tax Evasion and Avoidance on Economic Development of Grassroots in Nigeria

This study investigates the impact of tax evasion and avoidance on the economic development of grassroots communities in Nigeria. Taxation is a fundamental component of public finance and is instrumental in supporting socio-economic development. However, the extent to which tax evasion and avoidance affect the economic well-being of grassroots communities has received limited attention in the literature. The study adopted descriptive research method technique. The findings from this research reveal the multifaceted nature of this relationship. Tax evasion is shown to reduce government revenue, exacerbate income inequality, and undermine governance, all of which have adverse effects on the economic development of grassroots communities. Conversely, the impact of tax avoidance is more complex, as it can stimulate investments but also erode government revenue when practiced excessively. It was therefore, recommended the importance of addressing tax evasion and avoidance issues in Nigeria, especially concerning grassroots economic development. It emphasizes the need for more effective tax policies and enforcement mechanisms that promote compliance while encouraging legitimate investment.

Quid pro quo? Local government debt and corporate tax avoidance

This study examines the effect of local government debt (LGD) on corporate tax avoidance using a sample of Chinese-listed firms from 2007 to 2019. We find a negative relationship between LGD and tax avoidance only in the municipal state-owned enterprises (SOEs) controlled by the municipal government, suggesting that municipal officials focus on municipal SOEs to raise tax revenues to alleviate debt pressures. Further discussions show that the negative effect of LGD on municipal SOEs' tax avoidance is pronounced in politically connected managers, cities with worse fiscal situations and only present at the early phase of officials' tenure but insignificant later. We examine the economic consequences of politically driven tax planning and find that municipal SOEs with lower tax avoidance subsequently receive more government contracts as favor returns. Such favor exchange changes the distribution of current and future cash flows of the municipal SOEs, which are mainly determined by adjusting the composition of current accruals (i.e., more income-increasing earning management) and cash flow items (i.e., less tax avoidance). This study sheds light on the “two-way favor exchange” between governments and firms and provides implications for understanding local government leaders' heterogeneous incentives for tax enforcement and firms’ competing incentives for tax avoidance.

What we pay in the shadows: Labor tax evasion, minimum wage hike and employment

The interactions between minimum wage policy and tax evasion remain largely unknown. We study the firm-level employment effects of a large and biting minimum wage increase in the context of widespread wage underreporting. We apply machine learning to classify firms as either tax-compliant or tax-evading. We then show that firms engaged in labor tax evasion are insensitive to the minimum wage shock. Our results indicate that these firms use wage underreporting as an adjustment margin, converting part of their formerly undeclared cash payments into official wages. Increasing the minimum wage improves tax enforcement, but comes at the cost of negative employment consequences for compliant firms.