Organizational Structure and Tax Avoidance: Multinational Evidence from Business Group Affiliation

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2017-08-31
Authors
Matsunaga, Steve
Hong, Hyun
Kim, Jeong-Bon
Yi, Cheong
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We investigate whether business group affiliation affects tax avoidance in a global setting. While the business group structure could facilitate tax avoidance by allowing the ultimate owner to transfer resources and income across group firms, such activities likely incur nontax costs, such as minority shareholder protection, agency costs, and political costs. We find that, overall, business group firms exhibit greater tax avoidance than standalone firms, but the effect is restricted to firms in countries with developed economies where the nontax costs are lower. In contrast, we find that business group firms exhibit lower tax avoidance in emerging market countries, where the nontax costs are higher. This suggests that the nontax costs in emerging markets are sufficiently high to overcome the tax avoidance advantage provided by the business group structure. Our results therefore indicate that the business group structure enables group firms to reduce their tax liability, but that this ability is limited by the associated nontax costs.
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Tax Avoidance, Business Groups, International Tax Issues
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