Corporate Tax Evasion in a Globalized Enivronment

Diplomarbeit von Alexander Teepe

Abstract:

There are only few results of empirical research about corporate tax evasion and avoidance in comparison to individual tax evasion. One reason is a lack of exact data. Moreover, due to the nature of tax non-compliance it is not easy to calculate its volume. There is set of empirical questions on which we can make progress, such as the determinants of corporate evasion, for example the impact of penalties on corporate tax directors in large enterprises or the size of a company and the owner structure. It is material for policymakers to know which characteristic of enterprises let us assume that a firm evades more or less and which circumstances enhance corporate tax evasion.

We suggest that the developments in a more globalized world may change incentives for non-compliance of enterprises and change the options to evade taxes, in particular for import or export firms. The growing importance of transfer prices for tax directors of multinational enterprises may emphasize this assumption. But not only large multinational enterprises have options to evade taxes. Also smaller companies controlled by private owners can misstate import and export invoices in order to shift profits into low-tax countries or tax haven countries or build up capital in the informal economy.

We analyze the existing basic theory and provide a critical discussion to it. And we survey the existing empirical literature about corporate tax evasion. Furthermore, we present the results of a corporate tax survey in China and Germany. By this survey related to import and export firms of all size, evidence is provided that there are remarkable incentives to evade taxes by manipulation of commercial invoices.

We find that this type of tax evasion by importers and exporters is basically determined by the same effects as corporate tax compliance in general but there are in addition specific effects on compliance, such as effects by trading countries of the firms or by the supply chain. Finally, this paper presents various indications which imply the need of an international framework to analyze corporate tax compliance.

Table of Contents:

Table of Contents:

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Chapter 2.2, Previous empirical studies of corporate tax non-compliance - Determinants of compliance: The question whether a firm is evading taxes and especially what determines the decision of evasion and the amount of evasion is the essential question when researching noncompliance empirically. To specify an empirical model, we must consider some difficulties particularly relevant for the field of tax evasion which should be discussed here.

First, evasion is naturally difficult to observe because a participator of for example a tax survey will be reluctant to provide information about something illegal. In addition, it is not surprising that those who are not compliant undertake substantial effort to conceal their evasion, thus it is hard to find observables of tax evasion. A further risk beside a problem of anxiousness of participators in surveys is that the sample selection itself can be biased. Considering the data of taxpayer audits we face that problem that such data may exclude those not paying taxes at all (called „ghosts” in the literature) which are consequently not represented in the sample. In case of tax surveys it is problematic to estimate whether those who engage in evasion will send back a tax survey by a lower proportion or not and whether they admit the real share of for example hidden income or output because they are afraid of detection.

In general literature suggests that surveys are likely to overstate the degree of compliance. One possible reason is that taxpayers and examiners disagree about what constitutes noncompliance. Another important field of research is to use indirect approaches as the currency demand approaches for empirical evidence instead of micro data; which means that indirect indicators are used to get a link to the amount of underground activity or tax evasion. Such indicators may be estimated undeclared income or illegal employment. By estimating a gap between reported income and real expenditure evasion may become visible. Since in such procedures the dependent variable is only measured by a proxy and not directly they are rather less reliable.

In addition such an approach using data of national accounts is less effective because differences in the amount of evasion are not observable for different industries or other firm characteristics which can be only analyzed in micro data. More alternative possibilities to study evasion empirically are tax amnesty data and data generated through laboratory experiments.

This paper will concentrate on survey data, being aware of the possible risk of bias. Hence the advantage of surveys will be used such as firm characteristics of which we suppose they influence compliance can be included into the survey which would be not available to that extent in audit data or tax return data.

Not surprising one of the most researched questions in previous empirical papers about corporate tax evasions is why firms engage in evasion and what determines hiding output or understatement profits. This field of research is material for policymakers who want to maximize the tax revenue and for the tax-authority because audits can be more efficient if observables are better known which are likely to correlate with evasion. Enterprises of different countries face unequal circumstances in the economy referring to the development of tax morale, the dimension of the shadow economy, the quality of the legal system and other political and economic variables.

Consequently it makes sense as a first perspective to analyze determinants of hiding output as cross country analysis to examine determinants which vary between different countries. A recent trend was to use firm-level surveys to provide such data. For example the survey database of the World Business Environment Survey of the World Bank (WBES) launched in 1999 was administered to more than 10.000 firms in 80 different countries in 1999 and 2000.55. The survey includes questions about the underreporting behavior ( as „how many percentage of sales are hided” ) and many other questions regarding the business environment and firm characteristics as size, quantity of competitors, relationship to government officials and tax and regulatory, financing and legal constraints firms face and other questions were asked in the WBES survey. Hence it provides a perfect database to research the linkage between corporate tax evasion and its potential determinants. Many other determinants play a role as we will demonstrate in the following sections.