How Tax Enforcement Disparately Affects Domestic Corporations Around the World

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 evidence that changes in enforcement spending are associated with tax avoidance for multinationals. Results are most pronounced in recent years as income shifting strategies have become more common. Although we find this disproportionate effect occurs in countries with both low and high levels of corruption, domestic firms appear even more disproportionately affected by enforcement changes in less corrupt countries, including the U.S. Thus, we provide some evidence that the incrementally negative relation between changes in enforcement and tax avoidance for domestic firms is not limited to countries with weak governance.