Corporate tax competition between firms


Firms’ tax planning decisions, similar to their other operational decisions, are made in a competitive environment. Various stakeholders observe the tax payments and evaluate these against the relevant peer group. This implies firms might not simply minimise their tax burden, but also consider their competitors behaviour when deciding about tax planning. Empirically this creates interdependencies in the tax planning activities of firms. Introducing the concept of a reputational loss we show the positive interdependence in a theoretical model and test it in a spatial econometric model. Empirical evidence suggests that benchmarking takes place both within countries and within industries, however for the latter it is important to include firms in large non-EU OECD countries.


Simon Loretz and Padraig J Moore