Download This PaperForeign Competition and Tax Avoidance
57 Pages Posted: 30 Apr 2020 Last revised: 2 Mar 2021
Date Written: April 24, 2020
Abstract
We investigate the link between foreign competition and corporate tax planning. We find that a one standard deviation increase in import competition leads to a reduction of 9% in firms’ effective tax rates relative to standard levels. Further, we document that our evidence is robust to a battery of sensitivity tests and endogeneity concerns. Cross-sectional analysis shows that the association between foreign competition and tax planning is most pronounced among firms that: (i) are financially constrained; (ii) have the greatest ability to implement tax avoidance policies; (iii) have strong alignment of incentives between managers and shareholders; (iv) appoint high-quality auditors; and (v) attract more analyst coverage. Additional tests reveal that tax planning in the presence of foreign competitive threats enhances firm performance and investments, and improves managers’ career outcomes. Overall, we provide the first large-scale evidence that changes in the macroeconomic external environment are an important determinant of corporate tax planning activities.
Keywords: Foreign Competition; Tax Avoidance
JEL Classification: M40; M41; M48
Suggested Citation: Suggested Citation
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au
Financial Research Network (FIRN) ( email )
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia