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臺大管理論叢
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28
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1
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at a higher price than the fair value from their investees, or borrow money at higher
interest rates from their controlled entities.
In addition, the probability of detection can reduce with the length of corporate
pyramid. Regulators often have concerns about audit deficiencies that are attributed to the
business group setting (Doty, 2011). While many studies find tax-motivated income
reallocation among the affiliated firms (Harris, 1993), and firms that have more entities,
such as subsidiaries have greater opportunities for tax avoidance (Mills, Erickson, and
Maydew, 1998), the use of corporate pyramid makes it increasingly difficult for outsiders
to disentangle the rent extraction and tax avoidance. Bushman, Chen, Engel, and Smith
(2004) suggest that organizational complexity can limit corporate transparency and
increase information asymmetry. Manconi and Massa (2009) and Chan and Hsu (2013)
argue that the number of layers within a corporate pyramid makes the firm more opaque
and more difficult for the capital market participants to access its information. For
example, to transfer financial information from the bottom of investment layers to the
parent firm, the information of Shanghai Pacific Department Stores at layer 5 (See Figure
1) is consolidated with the parent’s accounting information through 5 times consolidation
process. Combining long length of layers of subsidiaries within a pyramidal firm creates
information aggregation problems that can result in substantial information asymmetries
within a firm, or between insiders and outsiders (including tax authorities). As the number
of investment layers increases, the process of transferring information from the lowest-tier
subsidiaries to the parent company becomes more complex, thereby rendering it more
difficult for external investors to assess and monitor the risk in the investment projects of a
firm.
With the above reasons, we expect that the number of layers is positively associated
with corporate tax avoidance. We form our hypothesis, stated in its alternative form, as
follows:
H1: Ceteris paribus, corporate tax avoidance is positively associated with the
number of layers in corporate pyramids.
We next examine whether the use of corporate pyramid makes it even easier to avoid
tax through offshore havens. Prior studies argue that multinational firms reallocate taxable
income from high-tax jurisdiction to low-tax-jurisdiction, or tax havens and the
reallocation occurs through structuring transactions between affiliates, such as royalty
payments, dividend repatriations and intra-firm debt (Dyreng and Lindsey, 2009;