In this study, we investigate the relationship between tax avoidance and earnings management in the largest five European Union economies by using artificial neural network regressions. This methodology allows us to deal with nonlinearities detected in the data, which is the principal contribution to the previous literature. We analyzed Compustat data for Germany, the United Kingdom, France, Italy, and Spain for the 2006–2015 period, focusing on discretionary accruals. We considered three tax avoidance measures, two based on the effective tax rate (ETR) and one on book-tax differences (BTD). Our results indicate the presence of nonlinear patterns and a positive, statistically significant relationship between discretionary accruals and both ETR indicators implying that when companies resort to earnings management, a larger taxable income—and thus higher ETR and lesser tax avoidance– would ensue. Hence, as also highlighted by the fact that discretionary accruals do not appear to affect BTD, our evidence does not suggest that companies are exploiting tax manipulation to reduce their tax payments; thus, the gap between accounting and taxation seems largely unaffected by earnings management.

In this work we study the determinants of the effective tax rates for corporate taxation in countries of the European Union. First, we carry out an exhaustive review of the empirical literature where no consensus is reached about the signs of the determinants and we can observe that in the case of the European countries this topic has scarcely received attention, contrary to the US case. Then from the Compustat database and for the period 1992–2009, we estimate quantile regressions that allow possible nonlinear relationships to be detected. The estimations reveal different effects of factors such as size, debt, asset composition and profitability on the effective corporate tax rate depending on the decile. In short, for companies with lower ETRs, the most influential variables are the size, the intensity of inventories and the profitability, whereas for the companies that suffer the highest fiscal pressure it is debt that turns out to be the strongest determinant. These results justify the employment of quantile regression instead of the traditional linear approximations. DOI: http://dx.doi.org/10.5755/j01.ee.25.5.4531

We investigate the relationship between the effective tax rate (E.T.R.) and company size in Germany to test tax planning–political power versus political cost theories. In contrast to most studies in this field, which use linear approximations, this paper uses a quantile regression approach. We use data from Compustat, corresponding to non-financial listed companies during 1992–2009. The results indicate a nonlinear relation, with a positive sign for the first quantiles and a negative one in the last part of the distribution. Additionally, leverage, inventory intensity and return on assets are found to be significant determinants of the E.T.R.

This paper examines the effect of state ownership on the effective tax rates of Spanish companies. Using information regarding 3169 companies during the period of 2008–2014, we show that there are significant differences between the tax burdens of non-state-owned enterprises (NSOEs) and state-owned enterprises (SOEs), with the effective tax rates of private ownership companies being higher than those of state-owned firms. Company features, such as size, leverage, research and development investment, profitability, firm age, foreign operations, and auditing determine the tax burden of private ownership firms. That of state-owned companies, however, is affected only by leverage and capital intensity. For both SOEs and NSOEs, the tax burden is lower when they are taxed under the Spanish special taxation regime for small- and medium-sized enterprises. In short, company characteristics are more important in private ownership firms, in which almost all the variables considered have certain repercussions. This result may be because private ownership companies devote more resources to tax avoidance, and their fiscal strategy may determine their economic and financial structure. However, SOEs present significantly lower effective tax rates than NSOEs, probably because of the tax incentives that the law provides for them to support their sustainability.