Does Tax Enforcement Disparately Affect Domestic versus Multinational Corporations Around the World?

Does Tax Enforcement Disparately Affect Domestic versus Multinational Corporations Around the World?

By Lisa De Simone, Bridget Stomberg, Brian Williams
2019Working Paper No. 3746

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Tax enforcement around the world has received increased attention since the Global Financial Crisis, with much stated focus on curbing perceived harmful tax practices of multinational entities. Yet multinationals have opportunities for tax avoidance in multiple jurisdictions whereas domestic firms do not. We therefore examine whether there is a differential relation between changes in enforcement spending and the tax avoidance of domestic versus multinational entities. Using OECD data on tax enforcement spending by 47 countries from 2005 to 2013, we find that increases in home-country enforcement spending are related to less firm-level worldwide tax avoidance for domestic firms relative to multinational entities. Multinationals engage in less tax-motivated income shifting out of their home country when home-country enforcement increases but increase tax avoidance in foreign countries, which allows them to maintain a consistent level of worldwide tax avoidance. In contrast, domestic firms decrease investments in labor following increases in home-country enforcement, consistent with these firms experiencing negative liquidity shocks. Results are robust to multiple measures of tax enforcement and avoidance across multiple countries and databases.