The impact of the COVID-19 pandemic on corporate tax avoidance: evidence from S&P 500 firms

Abstract

Purpose This study aims to examine the impact of the COVID-19 pandemic on corporate tax avoidance (TA). Design/methodology/approach The authors tested their predictions using a panel data set of US publicly traded firms listed in the Standard & Poor 500 index. Based on available information in the DATASTREAM database covering the 2019–2021 period, the authors used three proxies for TA, that is, the current effective tax rate (CUETR), the cash effective tax rate and book-tax differences (BTD). The authors estimated multiple regression models including industry and year fixed effects. The authors carried out additional analyses using BTD components, that is, temporary and permanent BTD, and testing for the impact of the COVID-19 pandemic across industries. Findings The results show that the outbreak of the novel coronavirus (COVID-19) affected positively the CUETRs and negatively BTD, indicating a reduction in TA, in the postpandemic period. Further analyses provide evidence that this effect is the same, regardless of the degree of industry failure probability, but it is more driven by the reduction of deferred tax expenses (temporary BTD component). These findings suggest that the US publicly listed firms have experienced a serious drop in their income in the postpandemic period, following the markets closure and the quarantine periods that hampered business. Therefore, with lower profits, they are not willing to evade taxes. Social implications This paper enriches taxation research during economic crises. The research findings have important policy implications. On the one hand, the fiscal policy should stimulate growth to allow firms to tackle the challenges they confronted post-COVID-19. On the other hand, the global economic crisis caused by the pandemic has led to a major deterioration in public finances and has raised inequalities across households. Therefore, it would be necessary to review public fiscal policies to achieve a balance of equity, growth and sustainability. In this context, tax reform focusing on tax progressivity could counter in part the negative economic effects of the COVID-19 pandemic and led to economy recovery. Originality/value This study contributes to the growing body of literature on the COVID-19 effects with a special focus on corporate practices. This study provides first evidence on the effect of the COVID-19 pandemic on manager’s behavior from taxation perspective. This study also enriches taxation research during economic crises.

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The moderating effect of tax risk on the relationship between tax avoidance and firm risk: empirical evidence in the French context

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Do Tax Rates Encourage Profit Shifts By Multinational Companies In Indonesia?

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