How Tax Enforcement Disparately Affects Domestic Corporations Around the World

How Tax Enforcement Disparately Affects Domestic Corporations Around the World

By Lisa De Simone, Bridget Stomberg, Brian Williams
October 2018Working Paper No. 3746

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Tax enforcement around the world has received increased attention since the Global Financial Crisis, with much focus on curbing the potentially harmful tax practices of multinational entities. Yet it is likely that multinational entities can better respond to home-country enforcement efforts than domestic firms because 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 46 countries from 2005 to 2013, we find that although increases in enforcement spending are related to less firm-level tax avoidance on average, the negative relation is concentrated among domestic firms; we find no little evidence of decreased tax avoidance among multinationals. Our results suggest that domestic firms, not multinationals, bear the burden of increased tax enforcement.