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Organizational structure and tax avoidance: multinational evidence from business group affiliation

In this study we investigate how business group affiliation affects tax avoidance across different economic and legal systems. The business group structure should facilitate tax avoidance by allowing the ultimate owner to transfer resources and income across group firms. However, such activities are likely to incur non-tax costs. In this paper we identify three potential non-tax costs (price discount by minority shareholders, reputational and regulatory costs, and political costs) and consider how they differ across two key characteristics that are deemed to affect the tradeoff between cash tax savings and non-tax costs associated with a country’s market development and legal origin. We find that, compared with stand-alone firms, business group firms exhibit greater tax avoidance in countries with developed economies or code law systems, where the non-tax costs are lower, and lower tax avoidance in countries with emerging economies or common law systems, where the non-tax costs are higher. Our results provide insights into the business group ownership structure and the impact of a country’s legal origin and economic development on corporate tax avoidance. _ Acknowledgements: We thank Ph.D. seminar/workshop participants at Fudan University (Shanghai), the University of Oregon, Sun Yat-sen University (Guangzhou), University of Waterloo and the tax research group at the University of California, Irvine, for helpful comments. Support from the Finance and Securities Analysis Center at the Lundquist College of Business is gratefully acknowledged. * Corresponding author.