Does Tax Enforcement Disparately Affect Domestic versus Multinational Corporations around the World?
Global tax enforcement has received increased attention since the Financial Crisis, with much stated focus on curbing perceived harmful tax practices of multinational entities. Yet multinationals can avoid tax in multiple countries whereas domestic firms cannot. We therefore examine whether there is a differential relation between changes in home-country enforcement and the tax avoidance of domestic versus multinational entities.
Using OECD data on 47 countries from 2005 to 2013, we find greater home-country enforcement is related to less firm-level tax avoidance for domestic firms relative to multinational entities. We find no differential relation between changes in tax enforcement and home-country tax avoidance, suggesting that even single-country efforts are not more successful at curbing multinationals’ tax avoidance.
Moreover, multinationals increase their tax avoidance in foreign countries when home-country enforcement increases. Thus, multinationals circumvent the negative effects of home-country enforcement and maintain a consistent level of worldwide tax avoidance. Results are robust to multiple measures of tax enforcement and avoidance across multiple countries and databases. These findings have implications for policymakers and highlight the importance of coordinated enforcement efforts across jurisdictions.