Tax Avoidance and Pyramidal Layers

Hsu, W. H., and Liu, H. T. 2018. Tax Avoidance and Pyramidal Layers. NTU Management Review, 28 (1): 1-42. doi:10.6226/NTUMR.201804_28(1).0001

Wen-Hsin Hsu, Professor, Department of Accounting, National Taiwan University
Hsin-Tsai Liu, Assistant Professor, Department of Accounting, National Taiwan University


This study investigates whether the span of corporate pyramids (as measured by the number of ownership layers) is associated with a firm’s tax avoidance activities. Using a unique sample of publicly traded non-financial firms of Taiwan, which are required to disclose information on all of their affiliates, we measure the span of corporate pyramids using the number of layers in them. Consistent with corporate pyramids generating higher agency costs and information asymmetries, we find that firms with a large number of layers engage in more tax avoidance activities, leading to lower effective tax rates. Furthermore, we find that the well-documented positive association between the level of tax avoidance and having investees in tax havens becomes more pronounced as the number of layers increases. Overall, the results support the argument that the length of pyramidal layers allows the parent firm to conduct intercompany transactions to prevent inappropriate tax avoidance activities from detection. 


pyramidal layerstax avoidanceeffective tax rate

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