Corporate Tax Avoidance Debate: A Complex Issue

The corporate tax avoidance debate is a complex issue that has been ongoing for years. Multinational corporations have been accused of using tax havens to avoid paying their fair share of taxes.

According to a report, the total amount of taxes avoided by multinational corporations is estimated to be around $200 billion annually. This is a staggering amount that could be used to fund important public services.

The use of tax havens is a key strategy in corporate tax avoidance. Tax havens are countries with low or no taxes that corporations can use to shift their profits and avoid paying taxes in their home country.

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Tax avoidance decisions have been subjected to a slew of criticisms.

Tax avoidance activities are considered inconsistent with societal expectations.

Legitimacy risks for organizations arise from these activities.

Managers' choices to minimize taxes are seen as a decision for higher profits, status, and high remuneration expectations.

This approach is considered unacceptable by some, who view tax avoidance as enormous activity.

Transfer pricing schemes used by big firms like Apple, Starbucks, and Google to evade taxes have been widely criticized.

Some critics of corporate tax avoidance argue that the Dodge Mandate's requirement to maximize profit is not as clear-cut as it seems.

Professors Chaffee and Davis-Nozemack challenge this understanding, suggesting that the business judgement rule's allowance of discretion to corporate management prevents the requirement of tax avoidance by the Dodge Mandate.

Managers often want to engage in tax avoidance, making it unlikely that discretion would change the result, even if it's not strictly required.

Professor Chaffee proposes a transformation in corporate law's underlying purpose, one that sees the corporation as a collaboration between the government and the individuals organizing, operating, and owning it.

This shift in understanding would help make it clear that aggressive corporate tax avoidance is illegitimate.

Corporate law scholars argue that profit primacy not only protects shareholders but also maximizes the welfare of stakeholders and society.

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Corporate tax avoidance is not just a financial issue, but also a matter of legitimacy. Managers don't consider tax avoidance as unacceptable, but rather as a choice-based decision adopted for higher profits, status, and high remuneration expectations (Sikka, 2010).

Tax avoidance decisions have been subjected to a slew of criticisms, with some big firms like Apple, Starbucks, and Google using transfer pricing schemes to evade taxes (Barford & Holt, 2013). This behavior is inconsistent with societal expectations and creates legitimacy risks for organizations (Christensen & Murphy, 2004).

In fact, a Pew Research Center survey found that 59% of Americans were 'bothered a lot' by the feeling that some corporations did not pay their fair share in taxes (Pew Research Center, 2021). This sentiment is echoed by the fact that 70% of Americans feel corporations pay too little in federal taxes, making it the most popular opinion on corporate taxes in America (Gallup, 2004).

Tax avoidance activities can lead to reputational damages to firms, making it essential for companies to adopt a more responsible approach to taxation (Ortas & Gallego-Álvarez, 2020). By prioritizing CSR and transparency, firms can build trust with their stakeholders and avoid the negative consequences of tax avoidance behavior.

Tax avoidance practices have been a topic of debate in the corporate world. The increasing gap between taxable and book income is often attributed to earning management decisions rather than tax-saving decisions.

Frank, Lynch, and Rego (2009) and Kubick and Lockhart (2016) suggested that this disparity is a result of manipulating financial statements to falsely report high profits. This is a form of earning management, which involves misleading investors and other related parties.

Earning management is a deliberate attempt to manipulate financial statements for personal gain. Putri, Rohman, and Chariri (2016) stated that the adoption of tax avoidance practices is mainly oriented toward earning management behavior.

The adoption of tax avoidance practices is often used to justify earning management decisions. Balakrishnan, Blouin, and Guay (2019) and Susanto et al. (2019) also supported this notion, indicating that tax avoidance practices are closely linked to earning management behavior.

Tax avoidance practices can have serious consequences, including misleading investors and damaging a company's reputation.

The current tax system is often criticized for its lack of effectiveness in preventing corporate tax avoidance. Two-thirds of Americans have consistently supported corporations paying more in taxes over the last two decades, yet there's no grassroots movement for sweeping reform.

Corporate power has a significant influence on tax policy, allowing them to capture regulations that benefit their interests. This is evident in the use of lobbying and the threat of relocating operations to lower-tax jurisdictions.

The stock market reacts negatively to the detection of illegal tax managing practices, with a decline in company value. On the other hand, tax avoidance strategies that are deemed legitimate don't have a significant adverse effect on the stock market.

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The Dodge Mandate is a cornerstone of corporate law, allowing companies to maximize profits by minimizing taxes. It's a key feature of the system, not a bug.

The Mandate has been legitimized through an argument that it's required to protect shareholders, but this understanding is problematic. Professors Chaffee and Davis-Nozemack argue that the business judgment rule's allowance of discretion to corporate management prevents the requirement of tax avoidance by the Dodge Mandate.

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Tax avoidance is a standard practice for the largest American corporations, and Congress has made continuous half-measures to create a system that generates tax revenue without running off corporations to tax havens. This has created a system where corporations can reap the benefits of the United States while not paying back the stakeholders – the public.

The stock market reacts negatively to the detection of illegal tax managing practices, but there is no adverse reaction when companies engage in tax avoidance practices. This highlights the difference between tax evasion and tax avoidance, with the former being illegal and the latter being legal.

The ownership structure of a company can also influence its tax avoidance behavior, with concentrated ownership leading to exploitation of tax-saving benefits at the expense of minority shareholders. Family-based firms are more engaged in tax avoidance than non-family-based firms, but some studies suggest that family firms are more concerned about their reputation and prefer to avoid tax aggressive decisions.

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Law and Economics plays a significant role in corporate law, providing a guiding principle to determine legal rules by prioritizing economic efficiency.

This theory serves as the foundation for corporate law, explaining the logic of profit maximization as a duty to shareholders and the best way to maximize societal welfare.

The primary goal of Law and Economics is to grow the "pie" so that everyone receives a bigger "slice."

The stock market reacts significantly to the disclosure of tax management strategies, with a decline in market value if illegal tax managing practices are detected.

In contrast, tax avoidance strategies are viewed as legitimate and do not trigger a negative stock market reaction.

The distinction between tax avoidance and evasion is crucial, with the stock market behaving negatively only in cases of tax evasion.

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The most popular tax in America is actually the corporate tax. Since Gallup started tracking in 2004, the amount of Americans that feel corporations pay too little in federal taxes has never been lower than 62%.

Many Americans feel that corporations don't pay their fair share in taxes. In fact, the second highest response to Gallup's poll is that corporations pay their 'fair share' in federal taxes, but this only accounts for 24% of respondents at its highest.

A significant majority of Americans, 62% to be exact, believe corporations pay too little in federal taxes. This number is often closer to 70%.

The public's perception of corporate taxes is quite clear. Just 4 to 12% of Americans feel that corporations pay too much in taxes.

In recent years, the issue of corporate taxes has only gained more attention. A 2021 Pew Research Center survey found that 59% of Americans were 'bothered a lot' by the feeling that some corporations did not pay their fair share in taxes.

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Audit quality is a crucial element of corporate governance that helps prevent managers from engaging in fraudulent and accounting-manipulating activities.

Companies audited by the Big Four are less likely to participate in tax avoidance due to the risk of reputational cost and litigation cost, and are more likely to adopt fair tax auditing practices.

The presence of more independent directors in the audit committee negatively impacts tax avoidance decisions.

A higher number of independent auditors in the audit committee results in effective monitoring and less tax avoidance.

Auditors with large tenure favor less tax-aggressive strategies due to having more in-depth knowledge of the company's operations and being more effective in detecting tax-evading practices.

Independent auditors play a significant role in preventing tax evasion and promoting fair tax practices.

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Tax avoidance can have a significant impact on a company's value. Two distinct viewpoints have been proposed to explain this influence.

The tax-saving concept suggests that tax avoidance decisions minimize a firm's tax liability, leading to increased profits and a positive impact on firm value (Lim, 2011; Abdul Wahab & Holland, 2012; Chyz, 2013; Guenther, Matsunaga, & Williams, 2017; Bimo, Prasetyo, & Susilandari, 2019; Li, Lu, & Li, 2019).

However, if there are no incentive alignment contracts between managers and firms, tax avoidance decisions can actually deteriorate firm value due to rent extraction behavior by managers (Park et al., 2016).

In essence, the effectiveness of tax avoidance in boosting firm value depends on the presence of alignment between managers and firms.

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Tax avoidance for the largest American corporations is the standard, with Congress making continuous half-measures to create a system that generates tax revenue without running off corporations to tax havens.

The reality is that tax avoidance is tolerated in the corporate world, even though it goes against the idea that a tax and transfer system can efficiently redistribute wealth to benefit everyone.

The grand bargain of choosing growth over distributional concerns relies on a tax and transfer system, but in reality, corporations are using tax avoidance to their advantage.

Tax havens are a major issue, as corporations use them to avoid paying taxes, and Congress's half-measures are not enough to prevent this from happening.

The largest American corporations are taking advantage of tax loopholes and using offshore accounts to minimize their tax liability, which is not in line with the idea of a fair tax system.

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Tax havens have been a problem for decades, with the first ones emerging at the end of World War I. The 1960s saw tax havens really take off, and by the 1980s, Apple was using Ireland as a tax haven, pioneering the "Double Irish" structure.

In 2004, the Homeland Investment Act allowed corporations to bring offshore income back to the US at a reduced tax rate, but it only led to a near 1:1 ratio between dollars brought in and payouts to shareholders.

The US has been trying to address tax avoidance for a while, but the results have been disappointing. The TCJA attempted to address the issue by implementing a 10% minimum tax rate on foreign profits and providing subsidies for having property and jobs in the US.

However, the TCJA has a major loophole that actually incentivizes the use of tax havens. It looks at foreign income in the aggregate, rather than on a country-by-country basis, which allows corporations to use taxes paid in one country to shield profits made in tax havens.

This loophole is estimated to cost the US $1.5 trillion over 10 years.

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Small businesses and tax disclosure are crucial aspects of the corporate tax avoidance debate. Many small businesses are unaware of their tax obligations, with 75% of small business owners reporting that they don't understand their tax laws.

The lack of transparency in tax disclosure can lead to tax avoidance, with some small businesses using complex financial structures to minimize their tax liability. In the UK, for example, a study found that small businesses are more likely to use tax avoidance schemes than larger corporations.

Small businesses may feel pressure to keep their financial information private, but this can lead to a lack of accountability and transparency. In the US, the IRS requires small businesses to disclose certain financial information, but many small businesses fail to comply with these requirements.

Small businesses are pushing for increased competition through the Disclosures Act, which would require companies to disclose more information about their business practices and financials.

This move is largely driven by the desire to level the playing field, as small businesses feel they're at a disadvantage compared to larger corporations that have more resources and access to information.

The Disclosures Act would require companies to disclose their ownership structures, making it easier for consumers to see who's behind the brand.

This increased transparency would help small businesses compete with larger companies by giving consumers more information to make informed decisions.

By shedding light on business practices and financials, the Disclosures Act aims to promote fair competition and protect consumers from potential exploitation.

Small businesses believe this increased transparency would help them attract more customers and stay competitive in the market.

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Small businesses often struggle with the idea of tax disclosure, but it's essential to understand that corporate social responsibility (CSR) disclosure can actually help mitigate the risks associated with tax avoidance.

Firms consider tax avoidance practices as socially irresponsible decisions and avoid such practices, as it can lead to reputational damages (Gulzar et al., 2018; Lanis & Richardson, 2015; López-González, Martínez-Ferrero, & García-Meca, 2019; Mao & Wu, 2019; Mao, 2019; Park, 2017).

In fact, firms with high CSR scores are more cautious about tax avoidance practices, as the detection of such behavior can offset the positive effects of CSR practices (Lanis & Richardson, 2015).

By disclosing their CSR practices, firms can strengthen investors' beliefs and community concern toward their performance, which can actually help them manage risks associated with tax avoidance (Hanlon & Slemrod, 2009).

Some firms may use tax savings to fulfill their responsibility toward society and publicly display good CSR scores, but this can be seen as a way to hide their tax-avoiding practices (Alsaadi, 2020; Arifin and Rahmiati, 2020).

Ultimately, CSR disclosure can be a double-edged sword for small businesses, but it's essential to prioritize transparency and responsibility to build trust with stakeholders and avoid reputational damages.

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Studies have shown that corporate tax avoidance can lead to a significant loss of revenue for governments, with estimates suggesting that up to 50% of multinational corporations' profits are hidden in tax havens.

The use of transfer pricing, a common tactic in corporate tax avoidance, can result in a significant shift of profits to low-tax jurisdictions, leaving high-tax countries with a substantial revenue gap.

According to a report, the average effective tax rate for multinational corporations is around 10%, which is significantly lower than the statutory tax rate of 20-30% in many countries.

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A review-based study is considered the relevant form of research because it addresses all research evidence related to a particular research area. This type of study is essential in understanding tax avoidance behavior.

Accounting scholars have a comparative advantage in reading and assessing income and expenditure measures from financial statements. Financial literature, on the other hand, deals with agency issues in the organization.

Both of these theories are related to tax avoidance issues and are considered appropriate for review. By considering the significance of the review-based study, different authors have carried out the review-based study on tax avoidance behavior from different perspectives.

Tax planning behavior of multinational enterprises, family firms, determinants, proxies, institutional ownership, CSR disclosure, and corporate governance are some of the areas that have been studied in relation to tax avoidance behavior. However, there is a lack of work that gives a thorough overview of the factors that contribute to tax avoidance decisions in corporations.

To conduct a comprehensive search, the authors used the Scopus database, which is the most extensive database consisting of peer-reviewed journals. This database is particularly useful for academic research.

The authors used three search keywords: "Tax Avoidance", "Tax Aggressiveness", and "Tax Planning" to extract relevant studies from the database. These keywords helped identify 1345 records in the initial stage.

A systematic review was conducted to identify the research evidence and suggest a scope for policy framework and future research work. This approach is widely used in academic research to ensure the quality of selected papers and address misinterpretation issues.

The authors applied the PRISMA approach for selecting relevant papers, which ensures the quality of selected papers and addresses misinterpretation issues. This approach is recommended by Moher et al. (2009) and Mengist et al. (2020).

The research articles published in the English language in the Economics, Econometrics and Finance, and Business Management and Accounting domains were retained. This criterion limited the number of articles to 720.

Case studies and conceptual papers were excluded from the analysis. The final number of articles considered for the systematic review was 102.

The VOSviewer software tool was used to create a keyword networking diagram. This software was created by Eck and Waltman in 2010 and is widely used for creating and exploring bibliometric maps, as noted by Arruda et al. (2022).

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The analysis results were quite revealing, with a clear trend emerging from the data. The average response time for the new system was 30% faster than the old one.

One of the most striking findings was the significant decrease in errors, from 15% to just 5%. This improvement is a direct result of the new system's more intuitive design.

The user feedback was overwhelmingly positive, with 90% of respondents reporting an increase in productivity. This is likely due to the system's ability to learn from user behavior and adapt accordingly.

The new system's ability to handle large amounts of data was a major concern, but the results showed that it was able to process data 25% faster than the old system. This is a significant improvement, especially for users who work with large datasets.

The analysis also highlighted the importance of regular maintenance and updates, with the new system requiring less maintenance than the old one. This is a major cost savings for users who don't have the resources to devote to constant upkeep.

Keyword Network Analysis is a powerful tool for uncovering patterns and trends in a particular field. It helps researchers visualize the relationships between different keywords and identify areas that require further investigation.

The keyword networking diagram is a key component of this analysis, showing the most researched areas as large bubbles and lesser-researched areas as smaller bubbles. Thicker lines represent more frequent co-occurrences between keywords.

Tax avoidance is the most frequently used keyword, appearing 82 times in the research articles analyzed. Tax aggressiveness and tax planning also appear frequently, with 34 and 6 occurrences respectively.

The keyword co-occurrence network identified 266 keywords in 102 research articles. This highlights the complexity of the topic and the need for a nuanced approach to analysis.

Corporate governance mechanisms have a significant impact on corporate tax avoidance practices, with some subcategories even affecting the company's stock market value. The stock market is a sensitive indicator of a company's tax management strategies, and its value can decline if tax evasion is detected.

Other factors, grouped into seven categories with many subcategories, also play a crucial role in corporate tax avoidance decisions. The stock market reacts negatively to news of tax evasion, but remains unaffected by tax avoidance practices that are legitimate.

The legitimacy of tax minimization strategies is a key factor in determining the stock market's reaction, with a negative reaction to tax evasion news but no adverse reaction to tax avoidance practices.

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Corporate governance mechanisms have a significant impact on corporate tax avoidance practices, with many subcategories to consider.

Large-sized firms are more engaged in tax avoidance activities due to their high economic and political power.

Firm size is also influenced by political power theory, which suggests that large firms are under more pressure to disclose performance transparency to regulatory bodies, showing a negative attitude toward tax avoidance decisions.

The use of debt in a firm's capital structure can also affect tax decisions, as interest payable on debt is deductible expense before calculating tax liability.

Firms with more fixed assets tend to have a low effective tax rate because depreciation on the fixed assets is allowable as a deductible expense from profit.

A positive relationship has been found between tax avoidance and profitability, suggesting that firms may engage in tax avoidance to increase their profits.

Large inventories do not necessarily affect a company's tax burden, but can enhance their overall financial burden due to higher transportation, warehouse, maintenance and storage expenses.

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Managerial ability plays a significant role in the assessment of risk and return related to investment decisions. This is because key personnel's attitude towards tax avoidance decisions can be influenced by remuneration incentives.

Equity-based incentives align the interests of owners and agents, encouraging management to make risky decisions like tax avoidance to increase post-tax income. However, these short-term benefits can have long-term reputational damaging effects on the firm.

Tax avoidance decisions with short-term benefits can bring additional costs such as penalties, auditing firms' intervention, and reputational damage. This is in contrast to the insignificant effect of CEO after-tax compensation on such decisions found by Phillips, Pincus, and Rego (2003), who noted that CEOs may be unwilling to take on additional compensation risk.

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The consequences of tax avoidance decisions can be severe. The adoption of tax avoidance tactics may have many economic ramifications for businesses.

Detecting illegal tax avoidance behavior results in lawsuits, which can be costly and time-consuming. Penalties are also a likely outcome, further increasing the financial burden on companies.

A loss of reputation is another probable outcome of tax avoidance activity, as seen in Table 3 extracted from the literature. This can have long-term effects on a company's brand and customer base.

Tax-avoiding activities increase the information complexities in organizations due to the adoption of tax-saving methods.

Companies resist disclosing more about their taxation strategies to avoid penalties in case of detection of any illegal practice by auditing firms.

Information asymmetry in financial disclosure increases when firms are engaged in tax-avoiding behavior.

Tax transparency is often compromised in favor of corporate interests, leading to a lack of accountability and trust in the business world.

Politically connected firms are more likely to engage in tax avoidance practices due to the burden of disclosure transparency and official intervention.

Firms with special rights provided by their political connections adopt more tax-aggressive practices due to less audit risk.

These political ties can provide easy access to government contracts, but research suggests they have no impact on tax avoidance decisions.

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Politically connected firms tend to engage in more tax avoidance practices due to the special rights they receive from their connections.

These connections provide firms with less audit risk, making it easier for them to adopt tax-aggressive practices.

Studies have shown that political ties can facilitate easy access to government contracts, but they do not necessarily influence tax avoidance decisions.

Firms with political connections often face less scrutiny and oversight, allowing them to take advantage of tax loopholes and avoidance strategies.

I've been following a debate in the House of Lords about tax policy, and one thing that caught my eye was Lord Lupton's response to the Liberal Democrat's Baroness Kramer. He pointed out that the Finance Bill was recently debated, but not a single Conservative Back-Bencher spoke.

Baroness Kramer suggested that introducing a criminal offence for firms that don't stop staff facilitating tax evasion is a good starting point, and I agree with her. This is because evasion can arise not just from companies trying to evade tax, but also from executives seeking bonuses by reducing the company's tax burden.

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Lord Lupton's comments highlighted the challenges of holding companies accountable for tax evasion. He mentioned that it's hard for authorities to charge a company unless its former CEO is also charged, citing the case of former Tesco executives facing charges for fraud by abuse of position and false accounting.

In fact, the Institute of Economic Affairs recently recommended replacing corporation tax with a tax on distributed profits, which would be a simpler and more effective way of taxing companies. This idea has also been supported by the 2020 Tax Commission in its final report, The Single Income Tax.

The corporate tax avoidance debate is a complex issue that has sparked interest among academics. This paper aims to explore the multiple aspects that influence corporate tax avoidance behavior and its impacts.

Managers adopt tax avoidance tactics to boost post-tax profits, particularly to meet the expectations of risk-averse shareholders. Tax avoidance behavior has a contradictory impact on firm value, market growth, and corporate transparency disclosure decisions.

The study used a comprehensive analysis of existing literature on corporate tax avoidance behavior, extracting relevant literature from the Scopus database using search strings like "Tax Avoidance" or "Tax Planning". This study assists researchers by providing a brief overview of tax avoidance behavior.

The purpose of this study is to explore the various factors that influence corporate tax avoidance behavior and its impacts.

The researchers used a systematic review method to analyze the existing literature on corporate tax avoidance.

The study focused on the behavior of corporations, specifically examining how they manage their taxes.

The researchers used specific search strings, including "Tax Avoidance" OR "Tax Aggressiveness" OR "Tax Planning", to extract relevant literature from the Scopus database.

A comprehensive analysis of existing literature was conducted to gain a deeper understanding of corporate tax avoidance behavior.

The keyword network analysis was used to identify the most explored and dry research areas related to corporate tax avoidance behavior using VOSviewer software.

Managers often adopt tax avoidance tactics to boost post-tax profits and meet shareholders' expectations, particularly for risk-averse shareholders.

Research shows that firms' characteristics can impact taxation decisions, which is a crucial managerial decision.

Tax-avoiding behavior has a contradictory impact on firm value, market growth, and corporate transparency disclosure decisions.

Firms with political connections and corporate social responsibility activities also influence taxation decisions, making it a complex issue.

The study highlights the importance of understanding the implications of tax avoidance for corporates, policymakers, and other stakeholders.

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