Internal Control vs External Manipulation: A Model of Corporate Income Tax Evasion

Chen, Kong-Pin; Chu, C. Y. Cyrus

doi:10.2139/ssrn.353860

Cited by 167 publications

(178 citation statements)

References 18 publications

Supporting

Mentioning

151

Contrasting

Unclassified

Order By: Relevance

“…1 For example, Dyreng et al (2010) report evidence that executives who were previously employed by firms that are characterized as tax aggressive seem to import this aggressiveness to their new employer. Slemrod (2004), Crocker and Slemrod (2005), and Chen and Chu (2005) suggest that corporate tax noncompliance (i.e., extreme tax avoidance) could result from the tax reporting incentives provided by managers' incentivecompensation contracts. Consistent with this notion, there is empirical evidence that tax avoidance is associated with greater levels of incentive compensation (e.g., Phillips, 2003;Rego and Wilson, 2012).…”

Section: Prior Literaturementioning

confidence: 99%

Corporate governance, incentives, and tax avoidance

Armstrong

Blouin

Jagolinzer³

et al. 2015

Journal of Accounting and Economics

692

242

View full text Add to dashboard Cite

We examine the link between corporate governance, managerial incentives, and corporate tax avoidance. Similar to other investment opportunities that involve risky expected cash flows, unresolved agency problems may lead managers to engage in more or less corporate tax avoidance than shareholders would otherwise prefer. Consistent with the mixed results reported in prior studies, we find no relation between various corporate governance mechanisms and tax avoidance at the conditional mean and median of the tax avoidance distribution. However, using quantile regression, we find a positive relation between board independence and financial sophistication for low levels of tax avoidance, but a negative relation for high levels of tax avoidance. These results indicate that these governance attributes have a stronger relation with more extreme levels of tax avoidance, which are more likely to be symptomatic of over-and under-investment by managers. Abstract: We examine the link between corporate governance, managerial incentives, and corporate tax avoidance. Similar to other investment opportunities that involve risky expected cash flows, unresolved agency problems may lead managers to engage in more or less corporate tax avoidance than shareholders would otherwise prefer. Consistent with the mixed results reported in prior studies, we find no relation between various corporate governance mechanisms and tax avoidance at the conditional mean and median of the tax avoidance distribution. However, using quantile regression, we find a positive relation between board independence and financial sophistication for low levels of tax avoidance, but a negative relation for high levels of tax avoidance. These results indicate that these governance attributes have a stronger relation with more extreme levels of tax avoidance, which are more likely to be symptomatic of over-and under-investment by managers.JEL: G34, H25, H26, K34, M41

show abstract

Section: Prior Literaturementioning

confidence: 99%

Corporate governance, incentives, and tax avoidance

Armstrong

Blouin

Jagolinzer³

et al. 2015

Journal of Accounting and Economics

692

242

View full text Add to dashboard Cite

show abstract

“…While this early body of research provides insights on individual tax evasion, a different conceptual framework is needed to understand aggressive tax reporting by large, publicly-held corporations (Slemrod 2004 19 Chen and Chu (2005) propose a model for corporate tax evasion that incorporates a contract between the risk-neutral owners of the firm and a risk-averse agent, responsible for filing the tax returns. In a traditional model of individual tax evasion, the individual weighs the higher payoff from evading taxes against the probability of being detected and the penalty imposed by the tax authority.…”

Section: Analytical Models Of Tax Evasionmentioning

confidence: 99%

“…Essentially, the activities that the manager engages in to evade taxes are also activities that allow the manager to divert the firm's resources for himself. Chen and Chu (2005) provide a simplified example in 20 which a restaurant manger is asked to evade taxes by not issuing receipts to cash-transaction customers (under-reporting income). However, by giving the manager discretion over recording revenue, the owners have opened the door for the manager to simply pocket a portion of the cash from un-reported sales for himself.…”

Section: Analytical Models Of Tax Evasionmentioning

confidence: 99%

“…Allingham and Sandmo (1972) show analytically that given a risk-averse taxpayer, evasion decreases as both the probability of detection and the penalty increase. 19 Chen and Chu (2005) propose a model for corporate tax evasion that incorporates a contract between the risk-neutral owners of the firm and a risk-averse agent, responsible for filing the tax returns. In a traditional model of individual tax evasion, the individual weighs the higher payoff from evading taxes against the probability of being detected and the penalty imposed by the tax authority.…”

mentioning

confidence: 99%

“…In a traditional model of individual tax evasion, the individual weighs the higher payoff from evading taxes against the probability of being detected and the penalty imposed by the tax authority. Chen and Chu (2005) argue that in addition to the traditional income vs. risk trade-off, corporate tax evasion involves the trade-off between efficiency loss of internal control and the expected gain from evasion. In their primary model, the efficiency loss comes from an incomplete contract between the firm's owners and the manager which induces distortions on the manager's effort.…”

mentioning

confidence: 99%

See 2 more Smart Citations

The Spread of Aggressive Corporate Tax Reporting: A Detailed Examination of the Corporate-Owned Life Insurance Shelter

Brown

2011

The Accounting Review

193

View full text Add to dashboard Cite

This paper investigates the spread of aggressive corporate tax reporting by modeling a firm's decision to adopt the corporate-owned life insurance (COLI) shelter. I use a sample of known COLI participants to examine whether certain firm characteristics are associated with the decision to adopt a COLI shelter. I find some evidence that firms with higher performancematched discretionary accruals are more likely to adopt a COLI shelter, suggesting a positive relation between aggressive financial reporting and aggressive tax reporting. I also find that firms with greater capital market visibility are less likely to adopt a COLI shelter, consistent with a potential reputational cost for being associated with aggressive tax avoidance activities. Further, my results suggest that COLI adopters are generally R&D intensive firms with low leverage and few foreign operations. In addition to firm specific characteristics, I consider two explanations for the spread of COLI adoption motivated by theory on diffusion of innovations and institutional isomorphism. I investigate whether firms imitate prior COLI adopters and whether COLI adoption spreads through common auditors. My results are not consistent with an imitation vii explanation. Further, my results suggest that having the same auditor as a prior COLI adopter does not increase the likelihood that a firm will adopt COLI.viii Table of PART I 6Chapter The tax shelter industry also distorts allocation of economic resources. Tax shelter activity diverts resources away from the government toward accountants, lawyers and others who develop and promote tax shelters. Moreover, according to theories of corporate tax incidence, engaging in a tax shelter cannot make a corporation, per se, better off. The benefits from reducing the corporation's tax bill will ultimately accrue to its shareholders through higher stock prices, its employees through higher wages, or its customers through lower prices. Exactly how the benefits will be shared is unknown, but Slemrod (2004) Frank et al. 2006). 3 However, ETRs and book-tax differences are noisy measures of aggressive tax reporting. ETRs vary with profitability, industry differences in the reporting of revenue and expenses, and legitimate tax planning opportunities. Consequently, it is difficult to distinguish lower ETRs due to better tax planning from those due to aggressive avoidance or shelter activity. List of TablesTreasury's (1999) report suggests that the growing gap between financial statement income and 2 Many studies rely on Bankman's (2004a) working definition of a tax shelter as a "(1) tax motivated; (2) transaction unrelated to a taxpayer's normal business operations; that (3) under a literal reading of some relevant legal authority; (4) produces a loss for tax purposes in excess of any economic loss; (5) in a manner inconsistent with legislative intent or purpose." See also Bankman (1999).3 Graham and Tucker (2006) identify known tax shelter participants. However, their study focuses on firms' debt policy decisions, no...

show abstract

Accountant CFOs and corporate tax avoidance

Gao

2021

J Corp Accounting Finance

View full text Add to dashboard Cite

This paper examines the association between Chief Financial Officers (CFOs) with accounting expertise (i.e., Accountant CFOs) and corporate tax avoidance. Specifically, I attempt to explore the impact of specialized accounting knowledge of CFOs on general and aggressive tax avoidance strategies. Consistent with my conjectures, I find that having accounting competence among CFOs is positively associated with their general tax avoidance behavior, suggesting that CFOs take advantage of their professional knowledge to reduce corporate tax payment to related tax authorities. In addition, the empirical evidence that I found also shows that accountant CFOs are less likely to involve in aggressive tax avoidance strategies. This conclusion is consistent with prior studies arguing that accountant CFOs are risk averse and conservative. In summary, accountant CFOs have quite different attitudes towards various tax avoidance activities depending on the underlying tax position of the tax planning behavior.

show abstract

Internal Control vs External Manipulation: A Model of Corporate Income Tax Evasion

Cited by 167 publications

References 18 publications

Corporate governance, incentives, and tax avoidance

Corporate governance, incentives, and tax avoidance

The Spread of Aggressive Corporate Tax Reporting: A Detailed Examination of the Corporate-Owned Life Insurance Shelter

Accountant CFOs and corporate tax avoidance

Contact Info

Product

Resources

About