Sustainable Tax Behavior of MNEs: Effect of International Tax Law Reform

Abstract

As tax is related to the sustainable growth of societies around the world, international tax avoidance by multinational enterprises (MNEs) has gained public attention. The Organization for Economic Co-operation and Development (OECD) introduced the Base Erosion and Profit Shifting (BEPS) Action Plan to promote sustainable tax behavior of MNEs. To guide policymakers and regulators in curving MNEs’ tax schemes utilizing market imperfection, this paper empirically assesses whether the international law reform regarding information disclosures on global operation achieves the intended result of lowering MNEs’ tax avoidance. In addition, the conditional effect of family ownership and intangible asset intensity is addressed to find the factors that strengthen the tax avoidance level of MNEs. This study employs propensity score matching and difference-in-differences method to analyze the changes in international tax liabilities of Korean MNEs in response to BEPS Action Plan 13. The empirical results show that the sustainable tax behavior of MNEs increased when international tax law demanded that they reveal critical information on global allocation of income, economic activity, and taxes paid among countries. Furthermore, the results show that there was a higher increase in the international tax liabilities of MNEs with higher intangible asset intensity. The results suggest to policymakers that the private information disclosure of MNEs’ global operation and sharing such information is essential in tackling MNEs’ BEPS activities, and intangible assets are indeed an important source of tax avoidance.

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