TY - JOUR

T1 - Perceived tax audit aggressiveness, tax control frameworks and tax planning

T2 - an empirical analysis

AU - Blaufus, Kay

AU - Reineke, Jakob

AU - Trenn, Ilko

N1 - Funding Information: We thank Jochen Hundsdoerfer (editor) and two anonymous reviewers for their helpful comments. K. Blaufus gratefully acknowledges financial support from KPMG Germany.

PY - 2023/4

Y1 - 2023/4

N2 - This paper examines whether a perceived increase in tax audit aggressiveness is associated with lower tax planning effort and a higher quality of internal tax control frameworks. Using survey data on corporate tax functions from approximately 200 firms from different countries, contrary to expectations, we find that neither internal nor external resources devoted to tax planning are lower for firms that perceive an increase in tax audit aggressiveness. Nevertheless, for these firms, we find a positive association with the quality of their tax control framework and their investments in the reputation management and communication skills of their tax department staff. In line with this, we find that an increase in perceived audit aggressiveness is directly (indirectly) associated with an increase in resources allocated to the tax function “controversy and audit defense” (“risk management and governance”). In addition, our results show a positive relationship between the quality of the tax control framework and the need for comprehensive improvements in human capital and internal processes, suggesting that the tax control framework affects the firms' perceptions of their tax capabilities and drives organizational changes. Overall, these findings are in line with the rationale that an increase in audit aggressiveness changes the costs of compliance errors such that firms improve the quality of their tax control framework to reduce future errors. In contrast, it remains unclear whether tax audit aggressiveness actually changes tax planning behavior, as we find no negative association with the firms' investment in tax planning.

AB - This paper examines whether a perceived increase in tax audit aggressiveness is associated with lower tax planning effort and a higher quality of internal tax control frameworks. Using survey data on corporate tax functions from approximately 200 firms from different countries, contrary to expectations, we find that neither internal nor external resources devoted to tax planning are lower for firms that perceive an increase in tax audit aggressiveness. Nevertheless, for these firms, we find a positive association with the quality of their tax control framework and their investments in the reputation management and communication skills of their tax department staff. In line with this, we find that an increase in perceived audit aggressiveness is directly (indirectly) associated with an increase in resources allocated to the tax function “controversy and audit defense” (“risk management and governance”). In addition, our results show a positive relationship between the quality of the tax control framework and the need for comprehensive improvements in human capital and internal processes, suggesting that the tax control framework affects the firms' perceptions of their tax capabilities and drives organizational changes. Overall, these findings are in line with the rationale that an increase in audit aggressiveness changes the costs of compliance errors such that firms improve the quality of their tax control framework to reduce future errors. In contrast, it remains unclear whether tax audit aggressiveness actually changes tax planning behavior, as we find no negative association with the firms' investment in tax planning.

KW - Tax avoidance

KW - Tax compliance management

KW - Tax control framework

KW - Tax enforcement

UR - http://www.scopus.com/inward/record.url?scp=85143897656&partnerID=8YFLogxK

U2 - 10.1007/s11573-022-01116-6

DO - 10.1007/s11573-022-01116-6

M3 - Article

AN - SCOPUS:85143897656

VL - 93

SP - 509

EP - 557

JO - Journal of Business Economics

JF - Journal of Business Economics

SN - 0044-2372

IS - 3

ER -