Content area
Full Text
Abstract
We empirically examine the relation between firms' headquarters location and their level of tax avoidance. Employing multiple measures of tax avoidance, we consistently find significant location fixed effects on firms' tax behaviour across different geographic areas in the US, after controlling for firm fixed effects, time-varying firm characteristics and state income tax rates. Additional analyses show that location fixed effects are more pronounced for firms that have been located in an area for a longer period and that have lower geographic diversification. We then explore a range of regional characteristics as determinants of location fixed effects and find some evidence that location-specific resources and risks factors, but not cultural factors, are associated with time-invariant differences in corporate tax avoidance across regions. Our study has important practical implications for tax authorities, suggesting that tax enforcement, education, and inspections should be tailored to take account of firms' geographical location.
Keywords: tax avoidance; geographic area; location fixed effects; location-based characteristics
(ProQuest: ... denotes formulae omitted.)
1. INTRODUCTION
Geographical location affects individual decision-making, leading to uneven distributions of economic and social outcomes such as innovations, health, crime and violence, as well as pro- and anti-social behaviour (e.g., Shaw & McKay, 1942; Land, McCall & Cohen, 1990; Jaffe, Trajtenberg & Henderson, 1993; Glaeser, Sacerdote & Scheinkman, 1996; Weisburd, 2015). While social scientists use location as a common unit of analysis to study individual behaviour, business studies have just begun to explore how spatial variations affect corporate behaviour. Parsons, Sulaeman and Titman (2018) take an initial step towards documenting significant differences in firms' financial misconduct rates across cities in the US. In this study, we examine whether there is a spatial variation in corporate tax avoidance policy.
Tax avoidance can be broadly defined as strategies that reduce a firm's tax burden (Dyreng, Hanlon & Maydew, 2008; Hanlon & Heitzman, 2010), not necessarily indicating any corporate wrongdoing. However, the boundary between aggressive tax schemes and breaches of tax obligations can be crossed without a clear distinction, and the extreme forms of tax avoidance, including tax non-compliance, evasion, and sheltering, are of great interest to tax authorities (Hanlon & Heitzman, 2010). Prior studies have documented several space-related determinants of corporate tax avoidance, including information flow within corporate group (Su, Li &...