We empirically investigate the effects of political uncertainty on corporate tax behavior. To identify the effects of political uncertainty, we construct a data set that tracks whether firms’ tax avoidance varies systematically around the occurrence of national elections. Our dataset includes firms exposed to 103 national elections in 30 countries. We find that corporate tax avoidance varies systematically across the election cycle, peaking in election years and declining the next year. The effect on tax avoidance is greatest for elections with greater electoral uncertainty, and for elections in countries with relatively lower quality of law, relatively weaker tax enforcement, and relatively lower book-tax conformity. The evidence suggests that firms use both conforming and nonconforming tax avoidance strategies, although the results for conforming tax avoidance are marginal.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2498198_code759215.pdf?abstractid=2498198&mirid=1

Corporate Tax Behavior and Political Uncertainty: Evidence from National Elections around the World

We investigate whether international income-shifting aggressiveness affects local investments. Amid heightened scrutiny of international activities by tax authorities, firms can support income-shifting goals by locating investments consistent with reported income. As a consequence, we predict firms that aggressively shift income will make affiliate-level investment decisions less influenced by local investment opportunities than firms that do not aggressively shift income. We use affiliate-level data from multinational corporations to develop a firm-year proxy for the sensitivity of reported income to cross-border tax incentives. Results suggest firm-years with below-median income-shifting aggressiveness exhibit a typical responsiveness of local investments to investment opportunities, but firm-years with above-median income-shifting aggressiveness exhibit no statistical relation. Consistent with expectations, these results are stronger for firms with better governance or subject to greater tax authority scrutiny. Our tests extend the literature on investment distortions by documenting that multinational corporations’ international tax considerations alter their local tangible investment decisions.

The Effect of Income-Shifting Aggressiveness on Corporate Investment

We examine the effect of government ownership on tax evasion in China. After correcting for the partial observability of tax evasion, we find that state-owned enterprises (SOEs) are more likely to evade taxes and less likely to be detected than non-SOEs. After being caught for tax evasion, SOEs also pay lower penalties. We show that tax evasion is positively correlated with effective tax rates (ETRs) and the effect of government ownership on tax evasion is opposite the effect of government ownership on ETRs. Our results suggest that tax evasion is fundamentally different from normal tax avoidance typically measured by ETRs.

https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=2883&context=soa_research

What types of publicly listed firms evade taxes? Evidence from China

We utilize extensive Internal Revenue Service data to investigate the tax behavior of comparable privately-held and publicly-held corporations. Our findings paint a nuanced picture of private versus public firm tax planning. Consistent with prior research, we find that private firms are more willing to engage in tax strategies that also decrease financial accounting income (conforming tax planning). Additionally, we find that private firms are more responsive to shareholder-level dividend taxes. However, tests reveal that private firms engage in either the same or less of other types of tax planning than their public peers. These tests include general measures of nonconforming tax planning and aggressive tax planning, in addition to specific measures such as tax haven usage and use of certain credits and deductions. Overall, our findings suggest that private firms have advantages over their public peers for some types of tax planning, but are not more active tax planners otherwise.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID3420362_code16319.pdf?abstractid=3420362&mirid=1

Is Tax Planning Best Done In Private


Purpose
This study aims to investigate the role of negative media coverage of environmental, social and governance (ESG) issues in deterring tax avoidance. Inspired by media agenda-setting theory and legitimacy theory, this study hypothesises that an increase in ESG negative media coverage should cause a reputational drawback, leading companies to reduce tax avoidance to regain their legitimacy. Hence, this study examines a novel channel that links ESG and taxation.


Design/methodology/approach
This study uses panel regression analysis to examine the relationship between negative media coverage of ESG issues and tax avoidance among the largest European entities. This study considers different measures of tax avoidance and negative media coverage.


Findings
The results show that negative media coverage of ESG issues is negatively associated with tax avoidance, suggesting that media can act as an external monitor for corporate taxation.


Practical implications
The findings have implications for policymakers and regulators, which should consider tax transparency when dealing with ESG disclosure requirements. Tax disclosure should be integrated into ESG reporting.


Social implications
The study has social implications related to the media, which act as watchdogs for firms’ irresponsible practices. According to this study’s findings, increased media pressure has the power to induce a better alignment between declared ESG policies and tax strategies.


Originality/value
This study contributes to the literature on the mechanisms that discourage tax avoidance and the literature on the relationship between ESG and taxation by shedding light on the role of media coverage.


Negative media coverage of ESG issues and corporate tax avoidance

y Can common empirical tests reliably identify tax avoidance? This is an important question because our understanding of the determinants of tax avoidance largely depends on results generated using such tests. We address this question by using a controlled environment to examine the effectiveness of empirical tests that use effective tax rates (ETR) and book-tax differences (BTD) as tax avoidance proxies. We seed Compustat data with three tax avoidance strategies and examine how reliably empirical tests identify this incremental simulated tax avoidance, all else equal. We find that power varies with the proxy and the type of tax avoidance. Thus, we offer guidance to researchers in matching specific types of tax avoidance with the most powerful proxy to detect it. We further offer evidence on how research design choices affect power. Results suggest researchers can increase power by eliminating observations with both negative pre-tax book income and negative tax expense, and by using robust regression to address data outliers. In contrast, power is impaired when truncating ETR proxies and when using Execucomp data. We also provide evidence that tests have less power to detect tax avoidance when multi-year ETR proxies are used.

How Reliably Do Empirical Tests Identify Tax Avoidance

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How Reliably Do Empirical Tests Identify Tax Avoidance