Tax-Motivated Income Shifting in Audit Firm Networks: Comparing Big 4 and non-Big 4 Firms

43 Pages Posted: 17 Jan 2022 Last revised: 22 Apr 2022

See all articles by Bradley S. Blaylock

Bradley S. Blaylock

University of Oklahoma - Michael F. Price College of Business

Elaine Doyle

University of Limerick - Kemmy Business School

Anastasios Elemes

ESSEC Business School

Date Written: April 22, 2022

Abstract

Income shifting tax avoidance strategies have garnered the attention of tax authorities, practitioners, academics, and social movement organizations over the past few years. Accounting firms are frequently identified as the architects of these structures. However, while their role in advising clients in this regard has been examined, their own activities have received little attention. Recent evidence suggests that Big 4 affiliated firms shift income among their separate legal entities to avoid tax. However, we don’t know if they are unique in this regard. This study uses a private firm dataset of Big 4 and non-Big 4 associated firms from 27 European countries finding evidence consistent with non-Big 4 associated firms shifting more income out of (into) profitable (loss) high tax incentive affiliates than their Big 4 counterparts. In supplemental analyses we provide evidence consistent with the negative association between Big 4 membership and tax-motivated income shifting being weaker when network exposure to the political costs of aggressive tax planning is lower. Finally, we show that, while tax motivations determine debt allocation decisions in both Big 4 and non-Big 4 network firms, political cost considerations are more likely to moderate debt allocation policies in Big 4 than non-Big 4 networks. Our findings suggest that tax-motivated income shifting is a common tax avoidance strategy among large accounting firm networks and highlight the importance of increasing regulatory and public scrutiny on the tax planning strategies of tax advisory firms at large.

Keywords: accounting-firm networks; income shifting; tax avoidance; political costs; debt structure

JEL Classification: M40, M41, M42, H26

Suggested Citation

Blaylock, Bradley S. and Doyle, Elaine and Elemes, Anastasios, Tax-Motivated Income Shifting in Audit Firm Networks: Comparing Big 4 and non-Big 4 Firms (April 22, 2022). Available at SSRN: https://ssrn.com/abstract=4009109 or http://dx.doi.org/10.2139/ssrn.4009109

Bradley S. Blaylock

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

Elaine Doyle

University of Limerick - Kemmy Business School ( email )

Limerick
Ireland

Anastasios Elemes (Contact Author)

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

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