by John Gallemore and Martin Jacob

Corporate tax enforcement has become a critical issue for many governments in recent years, given the massive amount of lost revenues and budget deficits. There is empirical evidence that corporate tax avoidance has increased over the past decades. [1] Some countries have responded by increasing coordination to combat tax avoidance. For example, the OECD countries created the Base Erosion and Profit Shifting (BEPS) project. At the same time, the IRS has seen its budget reduced in recent years. [2]

While policymakers have considered multiple remedies for combating aggressive corporate tax avoidance, such as withholding rules and information sharing, the IMF notes that “auditing remains crucial.” [3] Consistent with this idea, to aid the implementations of BEPS in developing countries, the OECD and the United Nations Development Program jointly started the Tax Inspectors Without Borders initiative to encourage greater investments in tax return audit capacity and to improve actual audit results. [4]

The obvious outcome of greater tax enforcement is a reduction in aggressive corporate tax avoidance. However, it is less clear whether and how tax enforcement affects firms and their stakeholders beyond tax payments. Understanding these “tax enforcement spillovers” is critical in assessing the overall net benefit of tax enforcement. Continue reading →