An empirical examination of the influence of e-commerce on tax avoidance in Europe
Introduction
We analyze the influence of e-commerce business practices on tax avoidance1, motivated precisely by the ongoing debate on the opportunities afforded by e-commerce for tax avoidance. Concerned by the strain placed on the international tax framework by the increasing integration of national economies and markets, the Organization of Economic Cooperation and Development (OECD) and G20 countries published their explanatory statement on the Base Erosion and Profit Shifting (BEPS) Project in 2015. BEPS refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. According to the statement issued, the digital economy has exacerbated the risks of BEPS (OECD/G20, 2015b). Consequently, the OECD and G20 countries developed and implemented the so-called BEPS package aimed at laying the foundations of a modern international tax framework, under which profits are taxed where economic activity and value creation occurs. Action 1 of this package addresses the tax challenges of the digital economy.
Likewise, various countries and tax jurisdictions, including the United States (US), the European Union (EU), and India, have developed their own initiatives to deal with the challenges posed by electronic commerce and the taxing of the digital economy. The recent EU Commission ruling in a case that saw Ireland granting undue tax benefits of up to €13 billion to Apple (European Commission, 2016) has given renewed attention to the relationship between tax avoidance and the digital economy. The EU Commission concluded that Apple was setting up their sales operations in Europe in such a way that customers were contractually buying products from Apple Sales International in Ireland, rather than from the shops that physically sold the products to customers. The EU Commission is still investigating other similar tax rulings (Wessel, 2016).
Electronic commerce or e-commerce is the trading or facilitation of the trading of products or services using computer networks, such as the internet or online social networks (Buettner, 2017). Since its inception, the development of e-commerce has enabled firms to circumvent conventional stages of taxation in multiple jurisdictions (Frecknall Hughes & Glaister, 2001). E-commerce firms have the advantage that location does not condition their activity to the extent that it does that of traditional firms with physical locations. Given that a permanent establishment is not required (Yapar, Bayrakdar, & Yapar, 2015), the internet environment facilitates the allocation of transactions to the most convenient jurisdiction to save taxes. As such, cost minimization through tax avoidance is the expected behavior of these firms.
Research on tax avoidance has advanced dramatically in recent years, but research on its association with the digital economy remains scarce. The relationship between taxes and e-commerce has been analyzed using different approaches in related fields, including law and public economics. For example, Hale and McNeal (2011) perform an empirical analysis of interstate and government practices in the US to tackle the taxation difficulties that typify e-commerce. The impact of e-commerce on the loss in revenue from sales taxes in the US has also been studied using aggregate data (Alm & Melnik, 2010; Bruce & Fox, 2000). Alm (2012) claims that tax avoidance in on-line commerce is especially important in the case of cross-border transactions.
E-commerce has increased dramatically in recent years, usually as a consequence of strategic business decisions and its perceived advantages over traditional commerce in terms of factors such as economic and information efficiency, coordination, and market impact. To the best of our knowledge, no empirical study has found firms reporting that they actually opt for e-commerce in a deliberate attempt to avoid paying taxes.
It could be argued that e-commerce has no influence on tax avoidance, that it is a strategic business model based on sound economic tenets facilitated by the technological possibilities of the digital era, where tax avoidance may, or may not, be a mere sporadic and unintended by-product of this business model. There are even some authors who identify the beneficial effects of this type of business for tax collection at an aggregate level. Emamverdi, Karimi, Shahkaram, Naseri and Hajmousavi (2013) report that the development of e-commerce is associated with increasing tax revenues in developing countries. However, this is probably not the true influence of e-commerce, but rather an indirect effect of a country’s economic growth thanks to e-commerce. The most common concern among academics and policymakers is that e-commerce creates conditions that favor tax avoidance.
Yet, studies conducted from a business or accounting perspective on the influence of e-commerce on tax avoidance remain scarce. To the best of our knowledge, there is virtually no empirical research testing the existence of an economic advantage for e-commerce firms, with respect to traditional retail firms, in relation to corporate tax avoidance. Hoopes, Thornock and Williams (2016) deal with value added taxes (VAT), but not with corporate tax. They find empirical evidence of the existence of a competitive tax advantage for e-traders with respect to traditional retail firms. They infer this influence from market reactions to changes in legislative proposals, but they do not use explicit tax measures for traditional and e-commerce retail firms. Klassen, Laplante and Carnaghan (2014) find an interaction effect between e-commerce and foreign income on tax avoidance. However, their study is more concerned about firms with high levels of foreign income than with the impact of e-commerce, and their analysis focuses on business-to-business (B2B) e-commerce transactions. In contrast, in our study we analyze firms that sell exclusively via business-to-consumer (B2C) e-commerce transactions. It is our contention that this provides a more focused analysis of the effects of e-commerce on tax avoidance, given that e-commerce is the core business of these firms. Moreover, we analyze all firms independently of their level of foreign income.
Europe is an exceptionally interesting setting for analyzing tax avoidance, given that most countries have experienced a considerable decrease in statutory and effective corporate tax rates, as well as the introduction of tax exemptions following the expansion of the EU in terms of both its membership and the size of its economic zone. Indeed, individual member state governments have specifically implemented such measures in order to compete with the more favorable tax and wage conditions of the EU’s newer members (Fuest, Perichl, & Siegloch, 2015; Genschel, Kemmerling, & Seils, 2011; Overesch & Rincke, 2011). Moreover, the European context provides an interesting multinational setting for this analysis.
Using AMADEUS, this study draws on a sample of consolidated accounting financial statements published by European retail firms from 22 different countries. We find that e-commerce firms are significantly more tax avoidant than traditional firms. Over the period studied, they avoided around 5 percentage points more of corporate taxes than traditional retail firms. However, as the latter have increasingly sought to avoid taxes, the gap between the two firm types has been reduced, and, as a result, e-commerce firms have progressively lost their former competitive advantage as regards tax avoidance. Various factors may have contributed to reduce this differential tax behavior, including the cut in statutory corporate tax rates in most countries, the increasing importance of intangible assets and multinational trade in all types of firm, and a learning effect whereby traditional firms are adopting e-commerce and behaving in a tax avoidant manner. Our results are robust to different specifications of tax avoidance, time, and sample selection criteria.
Our study makes several contributions to the published literature on tax avoidance. First, it contributes to what is an almost non-existent business literature on the association between e-commerce and tax avoidance. Second, we shed light on tax avoidance in the European context, which, despite being an exceptionally interesting setting for such an analysis, has been considerably less studied than the US context in empirical studies on tax avoidance. Finally, we are able to describe the trend taken by the tax avoidance behavior of these firms in recent years in Europe.
The rest of this paper is organized as follows. Following on from this introduction, we present, first, the hypotheses motivating the study; second, an explanation of the research methods; and, third, an overview of sample selection. We then present and discuss our results, and finally, offer our concluding remarks.
Section snippets
Hypotheses development
Basu (2007, p.104–105) claims that in taxation you first have to identify the tax base and then enforce the tax; yet, the anonymity and mobility associated with e-commerce complicates both of these tasks. In e-commerce, the possibilities of concealing a transaction are enormous, while the possibilities of identifying the parties to a transaction are, more often than not, almost non-existent. Basu goes onto argue that the two prevailing approaches to direct taxation, source- and residence-based,
Empirical model
Extant research has employed a variety of variables to explain tax avoidance, depending on the specific goal of each study and the data available to them. In line with the specific characteristics and purposes of our study, we formulate the following empirical model:
This model includes
Sample selection
The purpose of this study is to analyze the influence of the characteristics of e-commerce business practices on tax avoidance. We consider that Europe, and particularly the EU, is an especially interesting setting for this study, because firms operate across different countries with different statutory corporate income tax rates. Indeed, some of these countries have implemented special tax regimes. Within this context minimizing taxes may be a considerable competitive advantage. We do not
Results
Table 2 shows the descriptive statistics for our sample. The two groups of firm differ with respect to our independent variables. Although there are no significant differences, at p < 0.1, in terms of intangible asset levels and previous losses, the e-commerce firms in our sample are less indebted, bigger, and more profitable, and the share of their inventories and intangible assets are higher. However, many significant differences were found, as e-commerce firms have a lower share of tangible
Discussion
Our results show a statistical association between e-commerce business practices and tax avoidance. However, we have yet to perform an in-depth analysis of the specific actions implemented by these firms to achieve these tax benefits. Some initial observations might, however, be made about the difference in tax avoidance strategies adopted by traditional and e-commerce firms.
One of the main problems concerning the possibilities of e-commerce opting for tax aggressive practices (especially when
Conclusions
This paper examined the influence that e-commerce business practices have on tax avoidance. Using a panel data sample of European retail firms, we find strong empirical evidence that e-commerce does result in higher rates of tax avoidance in Europe. However, we also find that the tax avoidance rates of traditional retail firms have increased over time, thereby reducing the gap between the two types of firm, presumably as the former have increased the share of e-commerce in their total sales.
Declaration of Competing Interest
The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.
Funding
This work was supported by the Spanish Instituto de Estudios Fiscales from the Ministerio de Hacienda y Función Pública.
Acknowledgements
We acknowledge Maria Dolores Torregrosa Carne for her valuable comments and advise.
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