Internal digitalization and tax-efficient decision making

Klein, Daniel ; Ludwig, Christopher A. ; Nicolay, Katharina

Document Type: Conference presentation
Year of publication: 2021
Conference title: Annual Congress of the IIPF
Location of the conference venue: Reykjavik, Iceland, Online
Date of the conference: 18.-20.08.2021
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Publication language: English
Institution: Business School > ABWL u. Betriebswirtschaftliche Steuerlehre II (Spengel 2006-)
Subject: 330 Economics
Abstract: This paper investigates the effect of firms’ internal digitalization on the performance of business support functions such as the tax department. We put forward a novel, micro-level IT sophistication index based on a survey monitoring European firms’ digital infrastructure. Following the objective function of maximizing after-tax returns, we measure tax-efficient decisions in terms of minimizing the firm’s worldwide tax burden. We show that internal digitalization boosts firms’ ability to relocate income to taxfavored jurisdictions. We confirm this result using two plausibly exogenous shocks. First, we exploit a business software supply shock and provide evidence that the adoption of digital technologies enhances efficient cross-border tax planning. Second, using an event study design, we show that digitalized firms promptly adjust reported profits in response to income shifting incentive shocks. Overall, we show that digital infrastructure is a crucial foundation for timely, data-driven decision making and increases support functions’ performance.

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