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Article
Publication date: 12 April 2019

Otávio Gomes Cabello, Luiz Eduardo Gaio and Christoph Watrin

The purpose of this paper is to test if companies with a greater concentration of management ownership (and thus more risk-averse managers) avoid less tax.

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Abstract

Purpose

The purpose of this paper is to test if companies with a greater concentration of management ownership (and thus more risk-averse managers) avoid less tax.

Design/methodology/approach

The authors use a regression analysis with panel data, using as a sample of Brazilian companies from 2001 to 2015. The authors investigate the impact of insider ownership on tax avoidance, testing how and how much different ownership levels of inside owner are associated with tax avoidance measured by effective tax rates and book-tax differences.

Findings

The results indicate that different levels of management ownership are associated with different levels of tax avoidance behavior.

Originality/value

This paper contributes to the literature showing that ownership and decision making are not always focused on only a few decision makers. The owners are likely to be more risk averse and therefore less willing to invest in risky projects such as tax avoidance.

Details

International Journal of Managerial Finance, vol. 15 no. 4
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 11 September 2020

Alex A.T. Rathke, Amaury José Rezende and Christoph Watrin

This study investigates the impact of different transfer pricing rules on tax-induced profit shifting. Existing studies create different enforcement rankings of countries based on…

1547

Abstract

Purpose

This study investigates the impact of different transfer pricing rules on tax-induced profit shifting. Existing studies create different enforcement rankings of countries based on specific transfer pricing provisions on the assumption that larger penalties and more extensive information requirements imply higher tax enforcement. This assumption carries limitations related to the impact of transfer pricing rules in different countries and to the interaction of different tax rules. Instead, the authors propose a nonordered segregation of groups of countries with different transfer pricing rules, and they empirically investigate the impact of these transfer pricing rules on the profit-shifting behavior of firms.

Design/methodology/approach

The authors apply the hierarchical clustering method to analyze 57 observable quantitative and qualitative characteristics of transfer pricing rules of each country. This approach allows the creation of groups of countries based on a comprehensive set of regulatory characteristics, to investigate evidence of profit shifting for each of these separate groups. Profit-shifting behavior is measured by the variation in the volume of import and export transactions between local firms and related parties located in other countries.

Findings

The results indicate that firms have a higher volume of intrafirm transactions with related parties located in countries with a lower tax rate. This result is consistent with the profit-shifting hypothesis. Moreover, the results show that relevant differences in transfer pricing rules across countries produce different effects on the volume of intrafirm transactions. The authors observe that the existence of domestic transfer pricing rules that override the OECD Transfer Pricing Guidelines may inhibit profit shifting. In addition, the results suggest that the OECD guidelines may facilitate profit shifting. Overall, it is observed that some transfer pricing rules may be more effective than others in curbing profit shifting and that firms are still able to manipulate transfer prices under some tax rules.

Research limitations/implications

(1) The authors focus on the Brazilian context, which provides a suitable set of profit-shifting incentives for the analysis, since it combines an extreme corporate tax rate, a highly complex tax system, and a unique set of transfer pricing rules. (2) Profit-shifting behavior is captured by the volume of intrafirm transactions. The authors would prefer to observe the transfer price directly; however, this information is not disclosed by firms, for it may represent a limitation to the investigation. Nonetheless, theory shows that the profit-shifting behavior is reflected by the manipulation of both transfer prices and intra-firm outputs.

Practical implications

The authors find that the volume of intrafirm transactions may decrease or increase, depending on the transfer pricing system of the foreign country (including the tax-differential effect). It suggests that some transfer pricing rules are more effective than others in curtailing the profit-shifting behavior and that firms are still able to find vulnerabilities in current rules and take advantage of them in deploying a profit-shifting strategy.

Social implications

Results provide knowledge about how key differences on transfer pricing rules across countries influence the profit-shifting behavior. The results of the study may have valuable application in solving regulatory mismatches, to eliminate blind spots in transfer pricing rules and thus to contribute to the current review of OECD guidelines and to the global tax reset movement.

Originality/value

Recent studies suggest that if tax-avoidance incentives are somewhat weak, it becomes difficult to observe the shifting behavior of firms. The puzzle is to check whether profit shifting is nonexistent under weak incentives or whether this is a matter of methodological limitations. The authors’ analysis is applied to a complex tax background with strong profit-shifting incentives; thus, it allows the authors to obtain robust evidences of the shifting behavior and the effect of different transfer pricing rules.

Details

Journal of Applied Accounting Research, vol. 22 no. 1
Type: Research Article
ISSN: 0967-5426

Keywords

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Publication date: 20 October 2015

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Advances in Taxation
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ISBN: 978-1-78560-277-1

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Publication date: 18 December 2016

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Advances in Taxation
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ISBN: 978-1-78635-001-5

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Publication date: 22 October 2019

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Advances in Taxation
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ISBN: 978-1-78973-293-1

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Publication date: 16 June 2023

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Advances in Taxation
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ISBN: 978-1-83753-361-9

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Publication date: 20 June 2024

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Advances in Taxation
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ISBN: 978-1-83549-585-8

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Publication date: 19 October 2020

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Advances in Taxation
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ISBN: 978-1-83909-185-8

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Publication date: 18 September 2017

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Advances in Taxation
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ISBN: 978-1-78714-524-5

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Publication date: 9 December 2020

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Advances in Taxation
Type: Book
ISBN: 978-1-80043-327-4

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