Tax Complexity and Firm Tax Evasion: A Cross-Country Investigation

Abstract

This paper endeavours to investigate whether a complex tax system influences firms’ propensity toward tax evasion across countries. To achieve the objectives of this study, we utilised the World Bank Enterprise Survey and the World Bank’s Doing Business databases covering more than 46,000 companies from 83 countries. Our study revealed that the increased time required to pay taxes and higher total tax payments were associated with a greater extent and incidence of tax evasion among firms. The consistency of these benchmark regression results was proven through endogeneity analysis and several robustness tests. Furthermore, our heterogeneity analyses showed that the effect of tax complexity on firm tax evasion was more prominent in low- and lower-middle-income countries and also in the primary industry. These findings offer promising evidence for policymakers, particularly in low- and lower-middle-income countries where the majority of companies operate in the primary industry. Addressing the complexity of the tax system could potentially mitigate the adverse impact on tax evasion levels in these countries. Furthermore, our spatial analysis provides valuable insights, emphasising the potential impact of tax complexity in neighbouring countries and underscoring the necessity for policymakers in the home countries to strategise on harmonising and streamlining their tax systems.