The influence of tax institutions and management behaviour on tax avoidance of multinational firms: Tax planning of US vs. European Firms

• Applicant: Professor Dr. Michael Overesch
• Subject Area: Economic Policy, Applied Economics
• Term: since 2019
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 388587616

The public debate about aggressive tax planning mainly focuses on US multinational corporations (MNCs) which report very low effective tax rates (ETRs) on their foreign income. Apple or Starbucks are just two out of many US examples where big players engage in aggressive tax-avoidance strategies in foreign countries. It is often argued that US international tax law can explain the low ETRs of US MNCs. However, this may neglect other issues: US and European MNCs also differ in management culture, ownership structure, corporate governance, business models and other firm and organisational characteristics. Therefore, management behaviour of US and European CEOs, and particularly the choice of certain tax-planning techniques, likely differs. The objective of this research project is to gain a better understanding of the determinants of corporate tax expenses. We are particularly interested in how tax legislation and management behaviour interact as determinants of tax planning of multinational corporations. The central idea for our empirical analysis is a comparison of MNCs headquartered in the US with ones headquartered in Europe. Using data of US MNCs and their European competitors allows us to identify the effects of tax legislation and management practices. The major US tax reform provides exogenous variation for identification and interesting policy evaluations. The project consists of seven work packages. In a first step, we compile a rich and reliable dataset of US and European MNCs. Two work packages exploit the 2018 U.S. tax reform as a natural experiment to understand the consequences of this major tax reform and to highlight potential implications for competitiveness of firms and examine real economic effects. In addition, one package also analyzes the impact of recent changes in international tax rules. Another package examines the extent to which differences in the tax planning of MNCs can be attributed to managerial characteristics. We hereby also analyse the impact of a change in CEO or CFO on tax-planning strategies. Another work package examines how the increasing reporting of tax details in sustainability reports affects management decisions about tax planning. Finally, a work package will investigate whether the differences in tax planning between U.S. and European companies are mainly due to tax legislation or to different management behavior.

• DFG Programme: Research Units
• Subproject of: FOR 2738: Understanding the Behaviour of Multinational Corporations in the Context of International Tax Institutions
• Co-Investigator: Professor Dr. Georg Wamser