Does exchange of information deter tax avoidance : evidence from convention of double taxation taxes on income

Abstract

This project studies whether the establishment of a convention of double taxation taxes on income between the United States of America and other countries deter the U.S. registered multinational firms from engaging in a higher level of tax avoidance. Because the differences in income tax laws and information asymmetry between the U.S. and other countries, businesses operate in multiple jurisdictions could minimize the overall income tax liability by shifting their income in either country. While income tax convention intends to reduce double taxation on income for multinationals, it includes provisions such as article 26 Exchange of Information and Administrative Assistance that enables contracting countries to help each other in collecting their fair share of revenue. Taking advantage of the double income taxation conventions signed by the U.S. and other countries, I investigate the effect of a convention on multinationals' tax avoidance and erosion behavior (proxied by cash, GAAP, and current effective tax rates). I find that multinational firms with material operations in countries that have income tax convention with the U.S. will have higher effective tax rates afterward, suggesting the establishment of double taxation convention helps U.S. tax authority in combating tax erosion by the U.S. registered multinational firms.