This thesis contributes to the large literature of drivers of tax avoidance, for example tax system characteristics or the degree of tax incidence, by investigating which kind of firms drive the discovered difference in tax avoidance between countries. Thereby, it tries to answer the question which kind of firms benefit the most from common tax mechanisms and thus use them the most.
By doing so, this thesis focus on firm characteristics that are not part of the tax system itself, but rather are common characteristics associated with a difference in tax avoidance. Moreover, the research is complemented by investigating some tax related country characteristics to answer the question whether the observed firm-tax avoidance correlations differ depending on certain country-specific factors. The thesis therewith further completes the explanation for the difference between the degree of tax avoidance in different countries.
On January 22, 2019, the German political party Bündnis 90/Die Grünen published a study about the extent of tax avoidance in the European Union, revealing a gap between the effective tax rate paid by companies and the statutory tax rate in their home country. This gap between statutory tax rate and effective tax rate is one way of considering tax avoidance. There are other definitions as well, but overall tax avoidance can be seen as not paying the share of pre-tax income as taxes as intended by the government. In other words, tax avoidance is the attempt to legally reduce the tax burden paid to the government as much as possible.
Table of Contents
1 Introduction
2 Literature Review and Hypotheses Development
3 Empirical Approach and Data
3.1 Measures
3.2 Regression Models
3.2.1 Baseline Regression
3.2.2 Regression with Country Characteristics
3.3 Sample Selection and Descriptive Statistics
4 Empirical Results
4.1 Baseline Results
4.2 Results with Country Characteristics
4.3 Additional Analyses
5 Robustness Test
6 Conclusion
Research Objectives and Topics
The thesis aims to identify and analyze firm-specific characteristics that drive tax avoidance levels across an international sample of 55 countries. By investigating the influence of sales growth, profitability, and company size, the research seeks to explain cross-country differences in tax avoidance behavior, while also considering the moderating effects of statutory tax rates and book-tax conformity.
- Analysis of firm-level drivers for tax avoidance
- Examination of the relationship between firm size and political power/cost theories
- Impact of statutory tax rates on corporate tax planning incentives
- Role of book-tax conformity in constraining tax avoidance opportunities
- Empirical investigation across 55 countries from 2012 to 2017
Excerpt from the Book
1 Introduction
On January 22, 2019, the German political party “Bündnis 90/Die Grünen” published a study about the extent of tax avoidance in the European Union, revealing a gap between the effective tax rate paid by companies and the statutory tax rate in their home country. This gap between statutory tax rate and effective tax rate is one way of considering tax avoidance (Atwood, Drake, Myers & Myers, 2012). There are other definitions as well (Gebhart, 2017; Guenther, 2014; Salihu, Obid & Annuar, 2013) but overall tax avoidance can be seen as not paying the share of pre-tax income as taxes as intended by the government. In other words, tax avoidance is the attempt to legally reduce the tax burden paid to the government as much as possible.
When talking about tax avoidance, it is imperative to differentiate it from the illegal form called tax evasion. Tax avoidance refers to the exploitation of discontinuities of the tax law while having an “economic substance” or a “business purpose” (Lisowsky, 2010), whereas tax evasion refers to the illegal use of these tax shelters by for instance not disclosing assets hidden abroad, also considered as offshore tax evasion in tax havens (Alstadsaeter, Johannesen & Zucman, 2018; Johannesen & Zucman, 2014).
These legal tax shelters share the basic idea to increase the after-tax profit of a firm by efficiently reducing its tax burden paid to the government through earnings management or “state tax planning” (Gupta & Mills, 2002; Klassen & Shackelford, 1998). The Department of the Treasury (1999) formulates three methods of reducing corporate income tax liabilities: (1) excluding/deducting income from taxation transactions, (2) deferring income or losses into a later period, or (3) converting income into a different, lower-taxed form or jurisdiction.
Summary of Chapters
1 Introduction: This chapter provides an overview of tax avoidance, differentiates it from tax evasion, and outlines the motivation and structure of the thesis.
2 Literature Review and Hypotheses Development: This chapter reviews existing literature on firm-level tax drivers and develops five hypotheses regarding the influence of firm growth, profitability, size, and country-level tax systems.
3 Empirical Approach and Data: This chapter details the measurement of tax avoidance, the regression models used for the empirical analysis, and the process of sample selection from 55 countries.
4 Empirical Results: This chapter presents the regression results for the baseline model and the analysis of how country characteristics like statutory tax rates and book-tax conformity impact tax avoidance.
5 Robustness Test: This chapter tests the validity of the previous findings using a three-year tax avoidance measure to account for long-term tax planning effects.
6 Conclusion: This chapter summarizes the empirical findings, discusses the implications for policymakers and investors, and acknowledges limitations of the study.
Keywords
Tax Avoidance, Effective Tax Rate, Statutory Tax Rate, Book-Tax Conformity, Earnings Management, Corporate Tax Planning, Firm Characteristics, Sales Growth, Profitability, Firm Size, Tax Shelters, Political Cost Theory, Political Power Theory, International Taxation, Regression Analysis
Frequently Asked Questions
What is the core focus of this thesis?
The thesis examines how specific firm characteristics, such as size, profitability, and growth, influence the degree of corporate tax avoidance in an international context.
What are the central thematic fields covered?
The work covers corporate tax planning, the impact of country-specific tax regulations, the trade-off between tax base reduction and after-tax profit maximization, and the application of political theories to tax behavior.
What is the primary research goal?
The goal is to determine whether firm-level attributes can explain the varying levels of tax avoidance across countries and whether this effect is moderated by the country's statutory tax environment.
Which scientific method is utilized?
The author employs a quantitative empirical approach using linear regression models to analyze a panel dataset of firms across 55 countries from 2012 to 2017.
What is discussed in the main body?
The main body focuses on developing hypotheses based on prior literature, defining empirical measures for tax avoidance (specifically comparing one-year and three-year ETRs), and performing cross-sectional regressions to test the influence of country characteristics.
Which keywords characterize this work?
Key terms include Tax Avoidance, Effective Tax Rate (ETR), Book-Tax Conformity (BTaxC), Firm Profitability, and Political Cost Theory.
How does the author define tax avoidance versus tax evasion?
The author defines tax avoidance as the legal reduction of tax liabilities through tax planning, whereas tax evasion is described as the illegal exploitation of tax systems without economic substance.
What impact does book-tax conformity have on the findings?
The study suggests that higher book-tax conformity limits the opportunities for firms to avoid taxes, thereby potentially reducing the impact of firm-level characteristics on the overall level of tax avoidance in a country.
- Quote paper
- Simon Falcke (Author), 2019, A Countries' Level of Tax Avoidance. Empirical Investigation of Exemplary Drivers, Munich, GRIN Verlag, https://www.grin.com/document/540163
