Economic policy uncertainty and tax avoidance: International evidence

Abstract

In this study, we investigate how economic policy uncertainty (EPU) influences corporate tax avoidance using a dataset of listed firms from 22 countries spanning 1999 to 2019. Our findings align with the agency motive, showing that as EPU increases, firms tend to decrease their tax avoidance practices. Further analysis reveals that this negative relationship is particularly strong among unconstrained firms. We also observe that strong firm-level governance is associated with reduced tax avoidance during periods of heightened EPU. Furthermore, we investigate how institutional characteristics at the country level influence the relationship between EPU and firms' tax avoidance strategies. We find that firms in countries with strong governance, situated in developed economies, and adhering to stringent auditing standards are less inclined to engage in tax avoidance amid increasing EPU. Conversely, firms in countries with low GDP per capita, low governance scores, and located in emerging economies demonstrate a positive association between tax avoidance and EPU. Overall, our research highlights EPU as a key driver of corporate tax management, offering policymakers valuable insights into its potential impact on tax planning.