Tax Avoidance, Near‐Future Earnings, and Resource Availability

• Author: Namryoung Lee
• DOI: http://doi.org/10.1111/irfi.12221
• Published date: 01 June 2020
• Date: 01 June 2020

Tax Avoidance, Near-Future

Earnings, and Resource Availability

NAMRYOUNG LEE

Korea Aerospace University, Goyang-si, South Korea

ABSTRACT

This study examines the impact of near-future earnings and resource

availability on current-year tax avoidance behavior from the perspective of

both tax and non-tax costs. Two conclusions are reached. First, when firms

expect high-earnings performance in the near future, they aggressively

engage in current-year tax planning to manage potential future tax and non-

tax costs. Second, firms that expect high-resource availability in the

near future put tax audit risks and resultant non-tax costs on the front

burner. Therefore, they are unlikely to undertake aggressive tax avoidance

behavior.

Accepted: 29 May 2018

I. INTRODUCTION

Firms seek to maximize profits and minimize tax liabilities. The latter is one of

the most important aspects of financial planning, so firms tend to devise

sophisticated techniques aimed at tax avoidance. Recently, in terms of creativ-

ity, Apple’s tax avoidance scheme has been placed on par with its latest

iPhone.

1

Multinational companies like Apple have more opportunities to avoid

and evade taxes as they tend to shift profits to their subsidiaries (Omar and

Zolkaflil 2015). Furthermore, multinationals domiciled in tax havens face the

lowest taxes (Markle and Shackelford 2012). However, tax avoidance raises risks

for investors, draws scrutiny, and incurs reputational damage and other costs

outside of tax costs. Graham et al. (2014) found that reputational concerns were

important among all factors explaining why firms chose not to adopt a poten-

tial tax planning strategy. Nevertheless, many firms attempt to avoid taxes, and

numerous studies have investigated the motivating factors that drive aggressive

tax avoidance. For instance, firms are able to generate new sources of internal

funds by avoiding taxes (Edwards et al. 2013), and they can reduce their pro-

jected effective tax rates (ETRs) if they are not able to opportunistically achieve

earnings targets by other means (Dhaliwal et al. 2004). Various studies on tax-

minimization strategies have found that financially constrained firms are likely

to generate additional funds through tax avoidance behavior despite the risk of

1The European Sting, December 3, 2016.

© 2018 International Review of Finance Ltd. 2018

International Review of Finance, 20:2, 2020: pp. 537–548

DOI: 10.1111/irfi.12221