The Indirect Effect of Import Competition on Corporate Tax Avoidance

Abstract

The role of competition in corporate tax avoidance is theoretically unclear in the literature. The present paper clarifies this role with an empirical study and a focus on import competition. The analysis shows that competition fosters corporate tax avoidance. Consistent with profit shifting behavior, it also shows that the positive effect of competition on corporate tax avoidance is driven by multinational enterprises already implanted in tax havens. Competitive pressures prompt these companies to invest in intangible assets to limit losses in sales and profits through differentiation. At the same time, intangibles facilitate tax-motivated income transfers toward offshore financial centers. The findings shed light on the determinants of corporate tax avoidance and profit shifting. More generally, they help understand the decline in the average effective tax rate of US-listed firms, the ongoing backlash against large corporations and globalization, and the recent calls for reform of the international tax system.

Keywords: Corporate tax avoidance, import competition, multinational firms, profit shifting, intangible assets

JEL Classification: F14, F23, F60, H26, L60