Internal Control and Tax Avoidance

What is it about?

We study the role of internal control in tax avoidance by evaluating the efficacy of the COSO framework in tax risk management. First, we use a comprehensive COSO-based index in China that covers a firm's internal control over not only financial reporting, but also operations and compliance. Second, we perform quantile regressions to account for the entire tax avoidance distribution. These two key features enable us to find a nonlinear relation between internal control and tax avoidance, with the former having a moderating effect on the latter. Specifically, we show that internal control quality enhances tax avoidance for under-sheltered firms but curbs tax avoidance for over-sheltered firms. Moreover, the moderating role of internal control in tax avoidance alleviates tax volatility, supporting the accounting firms' recommendation to use COSO-based internal control in tax risk management.

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Photo by Chris Leipelt on Unsplash

Photo by Chris Leipelt on Unsplash