The role of regional tax autonomy, firm size, and business groups in tax avoidance: evidence from Spain

ABSTRACT

This paper investigates the influence of regional tax autonomy, firm size, and business group affiliation on corporate tax burden in a large sample of Spanish firms, including non-listed firms, from 2007 to 2016. Our findings reveal that firms located in tax-autonomous regions exhibit lower effective corporate tax rates (ETR), providing new empirical support for the horizontal tax competition theory. Additionally, we identify a positive relationship between firm size and corporate tax burden, aligning with the political cost theory. Furthermore, we find that group-affiliated firms face a higher ETR than independent firms, and that group affiliation attenuates the differences in the tax burden experienced by large and small firms.

KEYWORDS:

• Firm size
• business group
• effective tax rate
• tax autonomy
• Spain
• tax avoidance

JEL CLASSIFICATION:

• G30
• H25
• H26
• M21
• O52

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. We would like to thank conference participants of the XX AECA International Conference for their valuable comments and suggestions.

2. https://www.oecd.org/tax/beps/; https://taxation-customs.ec.europa.eu/anti-tax-avoidance-directive_en.

3. See https://elpais.com/espana/2021-08-07/el-debate-fiscal-en-torno-a-madrid-agita-el-tablero-politico.html, and https://www.elmundo.es/economia/macroeconomia/2023/04/27/644a850ee4d4d88c4c8b4601.html.

4. Corporate income tax law 27/2014. https://www.boe.es/buscar/act.php?id=BOE-A-2014–12328.

5. ZEC stands for ‘Zona Especial Canaria’ (Canary Islands Special Zone) which is a low tax zone created within the framework of the Canary Islands Economic and Tax Regime for the promotion of the economic and social development of the Islands and to diversify their production structure.

6. Consistent with existing empirical tax research, we use the term ‘tax avoidance’ throughout the paper, but the term can be used interchangeably with the terms ‘tax aggressiveness’ and ‘tax management’ (Chen et al., 2010; Landry et al., 2013; Lanis & Richardson, 2012).

7. We address this issue in our robustness section.