Societal Trust and Corporate Tax Avoidance

• Main Authors: Kanagaretnam, Kiridaran, LEE, Jimmy, LIM, Chee Yeow, LOBO, Gerald J.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2014
• Subjects: Trust; Tax Avoidance; Tax Systems; Formal Institutions; Informal Institutions; Accounting; Business Law, Public Responsibility, and Ethics; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/1288; https://ink.library.smu.edu.sg/context/soa_research/article/2287/viewcontent/Societal_Trust_and_Corporate_Tax_Avoidance.pdf
• Institution: Singapore Management University

Using an international sample of firms and a country-level index for societal trust, we study how differences in trust across countries relate to corporate tax avoidance. Consistent with our prediction, we find strong evidence that societal trust is negatively associated with corporate tax avoidance by firms, even after controlling for other determinants such as home country tax system characteristics. We also explore the effects of three country-level institutional characteristics – level of investor protection, disclosure requirement, and tax enforcement – on the relation between societal trust and tax avoidance. We predict and find that the effects of trust on tax avoidance are more pronounced when these institutions are weaker.