Wolff, Hubertus
(2019).
Essays on the Measurement of Corporate Tax Avoidance and the Effects of Tax Transparency.
PhD thesis, Universität zu Köln.
Abstract
This thesis aims at a better understanding of corporate tax avoidance, its empirical measurement and the evaluation of tools for policymakers in the global combat against it. The reliable detection and measurement of corporate tax planning strategies is indispensable for the design of targeted regulatory actions. Thus, the insights from this thesis hopefully contribute to the ongoing debate on the measurement of corporate tax avoidance and potential means to curb it.
Chapter 2 addresses the question whether net operating loss (NOL) observations can be implemented in the measurement of corporate tax avoidance and how the handling of losses affects the measurement outcome. It is demonstrated that NOLs can systematically be included in the analysis but only under certain restrictions. Only, if researchers control for the confounding effect of firm-profitability and heterogeneous characteristics of non-prospering firms, losses can meaningfully be implemented in the analysis. When researchers decide to remove NOLs from their sample, they should be aware of misleading tax expenses before and after loss-years that remain in the sample and do not signal tax planning. Eventually, it is shown that the loss-structure in the data partly conceals the true development of U.S. domestic firms’ corporate tax planning. Thus, tax researchers must pay close attention to NOLs regardless of whether they include them in the analysis or not.
Chapter 3 proposes a new measure for the aggressive part of international tax avoidance of multinational enterprises (MNEs). MNEs pay their taxes in all countries of operation and consequently face a spectrum of different statutory tax rates. Thus, we propose a measure of international tax avoidance that isolates more aggressive international tax planning from the influence of moderate tax rates in host countries. When applying the new measure it turns out that multinational U.S. firms systematically engage in aggressive tax planning that goes beyond the mere benefitting from moderate corporate tax rates. Furthermore, aggressive international tax avoidance is strongly associated with tax haven operations and enhanced opportunities to manipulate transfer prices. Lastly, we exploit data from a pioneering Country-by-Country Reporting (CbCR) initiative in the European financial sector and refine our measure with details on geographical corporate activities. This way we revise the perception of multinational banks’ tax aggressiveness and demonstrate how useful tax transparency data can be, if made available to the public.
Chapter 4 analyzes the effectiveness of tax transparency as a policy tool against international corporate tax avoidance. For this purpose, we examine how the aforementioned tax transparency initiative in the European banking sector affected the scope of banks’ aggressive tax planning. The Capital Requirements Directive IV from 2013 by the European Commission forced multinational banks to publish key financial and tax data in the form of CbCR for the first time in history. Our results suggest that European multinational banks experienced a significant increase in their effective tax levels after the regulation, relative to unaffected banks. In particular, we find that the multinational banks, which are most exposed to the newly demanded transparency through the revelation of their activities in tax havens, reacted the strongest to the mandatory disclosure of CbCR. Thus, CbCR appears to be an additional effective instrument for policy makers to curb cross-border corporate tax planning.
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