Essays on tax evasion and tax avoidance

Abstract

This dissertation comprises four articles concerning tax evasion and tax avoidance. The first study investigates if a one set of books transfer pricing strategy can be part of a multinational’s equilibrium strategy even though two sets of books provide an additional degree of freedom when transfer pricing is used for tax reporting and internal decision making. Using a game theoretic model the article shows that the penalty difference between the transfer pricing regimes in case of a detected non-compliant transfer price critically affects whether the multinational uses one set or two sets of books. Furthermore, the study shows that an increasing tax rate differential induces less tax-aggressiveness because high profit shifting incentives are anticipated by a strategic tax auditor. The second article analyzes transfer pricing of an intangible while endogenizing its location choice. Multinationals are often suspected of using transfer pricing of intangibles to shift profits from high-tax to low-tax jurisdictions. However, if spillovers from the use of the intangible are prevalent and the multinational faces a trade-off between spillover internalization and tax minimization a ’home bias’ might occur. In particular, for a high spillover and restrictions on tax avoidance, the intangible is optimally located in the headquarters which is in the high-tax country even though tax savings could be realized by locating the intangible in an offshore division. Additionally, the study shows that curtailing profit shifting possibilities can harm investment incentives. The third article investigates the interdependence between a firm’s tax reporting and investment behavior if the financial statement provides a noisy signal regarding the correct tax treatment of the project to a strategically acting tax authority. The study shows that the expected tax revenue for the tax authority can either increase or decrease with increasing book-tax conformity. Increasing book-tax conformity is detrimental for the investment incentives but leads to less understated non-conforming tax reports. The fourth article examines how taxes and the transfer pricing regulation affect the capacity planning of a multinational company. In a situation where tight regulation curbs the reporting discretion, multinationals can shift profits to low-tax jurisdictions by adapting real decisions instead of manipulating the transfer price. The article shows that taxes and transfer pricing regulation increase the probability of excessive capacity. Therefore, taxes and corresponding regulation are identified as potential antecedents for organizational slack.