Are Risk-based Tax Audit Strategies Rewarded? An Analysis of Corporate Tax Avoidance

56 Pages Posted: 27 Aug 2021 Last revised: 14 Sep 2021

See all articles by Eva Eberhartinger

Eva Eberhartinger

Vienna University of Economics and Business

Reyhaneh Safaei

Paderborn University; TRR 266 Accounting for Transparency

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business; TRR 266 Accounting for Transparency

Yuchen Wu

Ludwig Maximilian University of Munich (LMU); TRR 266 Accounting for Transparency

Date Written: September 1, 2021

Abstract

This study examines the relation between risk-based tax audit strategies and corporate tax avoidance. We exploit OECD data across 54 countries on risk profiling, predictive modeling, and internal intelligence functions in tax administrations from 2014 to 2017 to investigate whether risk-based tax audits have an incremental effect on tax avoidance beyond enforcement. Our results suggest that the use of risk-based tax audits is associated with lower tax avoidance when controlling for tax enforcement, firm-specific, and country-specific factors. Cross-sectional tests indicate that risk-based tax audit strategies are effective tools to curb tax avoidance across firms of all sizes. The results of additional cross-sectional analyses indicate that risk-based tax audits are more effective in countries with low governance quality, high GDP, and low trust in governments. In additional tests, we use country-level data on tax administration performance and find evidence that countries with a risk-based audit strategy have lower costs of tax enforcement and improve the performance of tax authorities. Overall, our findings indicate that risk-based tax audit strategies have an incremental effect on attenuating firms’ tax avoidance and increasing tax revenue.

Keywords: tax audits, tax avoidance, tax compliance, tax enforcement, tax risk

JEL Classification: H25, H26, M41, M42, M48

Suggested Citation

Eberhartinger, Eva and Safaei, Reyhaneh and Sureth-Sloane, Caren and Wu, Yuchen, Are Risk-based Tax Audit Strategies Rewarded? An Analysis of Corporate Tax Avoidance (September 1, 2021). TRR 266 Accounting for Transparency Working Paper Series No. 60, WU International Taxation Research Paper Series No. 2021-07, Available at SSRN: https://ssrn.com/abstract=3911228 or http://dx.doi.org/10.2139/ssrn.3911228

Eva Eberhartinger

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna 1020
Austria

HOME PAGE: http://www.wu.ac.at

Reyhaneh Safaei (Contact Author)

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

Caren Sureth-Sloane

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

Yuchen Wu

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

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