Tax Haven Networks and the Role of the Big 4 Accountancy Firms

Abstract

A B S T R A C TThis paper investigates the association between the Big 4 accountancy firms and the extent to which multinational enterprises build, manage and maintain their networks of tax haven subsidiaries. We extend internalisation theory and derive a number of hypotheses that are tested using count models on firm-level data. Our key findings demonstrate that there is a strong correlation and causal link between the size of an MNE's tax haven network and their use of the Big 4. We therefore argue that public policy related to the role of auditors can have a significant impact on the tax avoidance behaviour of MNEs.

The determinants of tax-haven use: evidence from Canada

“…Other researches (McGuire et al, 2012;Jones et al, 2018) find that multinationals taking on a Big-4 firm to audit their accounts become more tax aggressive. Given that the Sarbanes Oxley Act of 2002 allows big 4-international accountancy firms to provide both audit services and tax services to their clients, many cases of tax avoidance are helped by big 4-audit firms.…”

“…Statistics Canada estimates that Canadian firms have invested 5 Large tax havens are large countries with populations exceeding one million in 1982 , and exceeding 2 million in 2013 (Jones and Temouri, 2016). Jones et al (2018) is the first cross-country study examining the relationship between using Big-4 auditors and the extent to which MNFs utilize TH subsidiaries. They find that MNFs hiring big 4-audit firms increase the size of their TH networks, compared to those companies that do not use a big 4.…”

The Wealth Defence Industry: A Large-scale Study on Accountancy Firms as Profit Shifting Facilitators

“…While most evidence for the practice of accountancy firms to market innovation and tax schemes across their network is based on qualitative case studies and journalistic revelations, some studies explored the issue systematically. Jones et al (2018) arguably provide the first large-scale analysis which places the involvement of accountancy firms in the wealth defence business at its core. The authors adopt a perspective focusing on the internationalisation strategies of firms.…”

“…Refining the classical 'internationalisation theory', which provides a framework for understanding the decisions of companies to build entities abroad, they add specific hypotheses at the country and firm level on the expansion into jurisdictions with favourable tax environments. They find that corporations which take on a Big Four auditor have more subsidiaries in tax havens than companies with a smaller auditor and they have a significantly higher growth rate of tax haven-based subsidiaries than firms with another auditor (Jones et al 2018).…”

“…We are particularly interested in how firms use their subsidiary network as tools for their wealth defence. Jones et al (2018) give an excellent example of work that establishes a systematic understanding of the extent to which accountancy firms are involved in the wealth defence business. Investigating 6,000 multinational companies, they showed that clients of the Big Four have a higher presence in offshore jurisdictions than other companies.…”