Tax Avoidance, Near‐Future Earnings, and Resource Availability

DOIhttp://doi.org/10.1111/irfi.12221
Published date01 June 2020
Date01 June 2020
AuthorNamryoung Lee
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 rms
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, rms 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 prots and minimize tax liabilities. The latter is one of
the most important aspects of nancial planning, so rms tend to devise
sophisticated techniques aimed at tax avoidance. Recently, in terms of creativ-
ity, Apples 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 prots to their subsidiaries (Omar and
Zolkail 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 rms chose not to adopt a poten-
tial tax planning strategy. Nevertheless, many rms attempt to avoid taxes, and
numerous studies have investigated the motivating factors that drive aggressive
tax avoidance. For instance, rms 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 nancially constrained rms are likely
to generate additional funds through tax avoidance behavior despite the risk of
1 The European Sting, December 3, 2016.
© 2018 International Review of Finance Ltd. 2018
International Review of Finance, 20:2, 2020: pp. 537548
DOI: 10.1111/ir.12221

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