Data Vis Map

LOBBYING AND TAX AVOIDANCE IN EU COUNTRIES

Mario albertini n.2089664

Is it the same for the European context?

Two hypotesys:

• H1: firms that engage in lobbying activities inside the EU are more likely to secure lower effective tax rates as in the US.

• H2: in the EU the potential for tax avoidance is limited by an environment characterized by rigorous demands for transparency and accountability, to the extent that lobbying does not constitute a worthwhile investment for achieving tax avoidance.

"Lobby more, pay less in taxes" (Drutman, 2012) "Corporations Are Spending Millions on Lobbying to Avoid Taxes" (Fonger, 2021) "Giving Too Much and Paying Too Little" (Lin, 2020)

"chi più spende meno spende" (Goldoni, 1755)

LOBBYING AND TAX AVOIDANCE IN EU COUNTRIES

Mario albertini n.2089664

LOBBYING AND TAX AVOIDANCE IN EU COUNTRIES

The LobbyingMap Overview

The practice of tax avoidance and lobbying have deep historical roots, with evidence of individuals and businesses seeking to minimize tax burdens dating back to ancient civilizations. As commerce expanded during the Industrial Revolution, the complexity of tax systems increased, prompting businesses to find ways to legally reduce taxes.

Mario albertini n.2089664

≈ 2200 cross-section firm-year observations

LOBBYING AND TAX AVOIDANCE IN EU COUNTRIES

LOBBYING DATA

• Transparency register
• Companyes
• > 1 Million expenditure -> 75% of total exp

• web-scraped from 2014-2023

FINANCIAL DATA

• Identifyed best representative of group
• same industry
• preferably in eu
• normally parent company

• Matched trough development

METHODOLOGY - DATA SOURCES

Mario albertini n.2089664

MODEL

TaxAvoidancei,t (etr) = Tax avoidance measure; LOBBYi,t-1 (wlog_lobby) = Natural logarithm of expenditure reported in the Transparency Register for firm i, year t-1; ROAi,t (wroa) = Return on assets, defined as 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡/𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡 for firm i, year t; GEARINGi,t (wleverage) = Leverage for firm i, year t; PPEi,t (wtang) = PPE scaled by total assets for firm i, year t; ITSi,t (wintangibles) = Intangible assets scaled by total assets for firm i, year t; SIZEi,t (wsize) = Natural logarithm of the total asset value for firm i, year t; εi,t = disturbance or residual term for firm i, year t;

METHODOLOGY ETR

LOBBYING AND TAX AVOIDANCE IN EU COUNTRIES

Mario albertini n.2089664

CONTROL VARIABLES

Effective Tax Rate (etr) - mean value of 0.148 (or 14.8%) - median of 0.00% Logarithm of lobbying expenditure (wlog_lobby) - mean of 13.80 -> substantial lobbying expenditure in raw (unlogged) terms - relatively low standard deviation (SD = 1.04) -> fairly similar within this sample Firm size (wsize), - mean of 24.55 - standard deviation of 2.87

LOBBYING AND TAX AVOIDANCE IN EU COUNTRIES

Mario albertini n.2089664

CORRELATION MATRIX

ETR variable (etr) is positively correlated with Lobbying expenditure (wlog_lobby) ( r = 0.272). - firms with higher lobbying expenditures tend to have higher effective tax rates indicating that lobbying might be associated with less aggressive tax avoidance strategies. ETR is positively correlated with firm Size (wsize) ( r = 0.245 ) - larger firms report higher effective tax rates on average. Lobbying expenditure is positively correlated with firm size (wsize) ( r = 0.292 ) - larger firms are more likely to spend on lobbying activities ("When size matter", Jaffard, 2020)

LOBBYING AND TAX AVOIDANCE IN EU COUNTRIES

Mario albertini n.2089664

Drope and Hansen (2008) Cao et al (2014) Mills et al. (2013) Northcut and Vines (1998) Aggarwal and Wang (2012) Bronars and Lott Jr (1997)

H2: in the EU the potential for tax avoidance is limited by an environment characterized by rigorous demands for transparency and accountability, to the extent that lobbying does not constitute a worthwhile investment for achieving tax avoidance.

RESULTS

R-squared of 0.2454 -> approximately 24.5% of the variance in ETR is explained by the model.The Adjusted R-squared of 0.2062 -> the model is adequately specified and not too complex.Lobbying expenditure (wlog_lobby) and ETR (r = 0.272). - favorable public and regulatory image - transparency and accountability measures are stringent- risks associated with aggressive tax avoidance. - regulatory capture (Stigler, 1971) -> lobbying in this setting may function as a means to ensure favorable but not overly permissive regulatory conditions. Size (wsize) positive and statistically significant positive correlation with ETR (r = 0.245) - regression coefficient of 0.0126 reinforces this trend.- scale and visibility problem -> face greater regulatory and public scrutiny deterring from tax avoidance Size (wsize) positive correlation with lobbying expenditure (r = 0.292) - larger engage more in lobbying activities -> consistent with prior literature and theoretical expectations- tool for regulatory engagement and maintaining favorable business conditions -> not only fiscal lobbying

LOBBYING AND TAX AVOIDANCE IN EU COUNTRIES

Mario albertini n.2089664

Relatore: anna alexander vincenzo

Thanks for your attention

LOBBYING AND TAX AVOIDANCE IN EU COUNTRIES

Mario albertini n.2089664

REGRESSION

The model was estimated using - Ordinary Least Squares (OLS) - Country-year fixed effectLobbying expenditure (wlog_lobby) has a positive and statistically significant relationship with the ETR with a coefficient of 0.040. - aligns with the hypothesis that firms engaged in lobbying tend to adopt less aggressive tax planning strategies. Firm size (wsize), has a positive and significant coefficient of 0.0126- indicates that larger firms tend to have marginal higher ETRs .

LOBBYING AND TAX AVOIDANCE IN EU COUNTRIES

Mario albertini n.2089664

The European Union context

Recent Complex System

• New dimension of lobbying.
• Strict transparency and accountability rules and requirement for companies to disclose lobbying activities.
• Variety of legislations systems.

• Presence of intra union tax havens and soft laws.
• Cross-Border Arbitrage.
• International Cooperation.

Reasons behind Fiscal Lobbying

Exogenous lobbying incoming from Asia

Fiscal lobbying involves companies influencing tax policies and regulations to achieve favorable tax conditions. This can include efforts to lower corporate tax rates, secure tax incentives, or shape tax legislation that benefits their financial interests. The goal is to reduce tax liabilities, enhance profitability, and gain a competitive edge by advocating for tax frameworks that align with corporate strategies.

The context of the US

The previous litterature on the correlation between Lobbying and the Effective Tax Rate

Signalling of a negative correlation: Meade and Li (2015)Brown et al. (2015)Barrick and Brown (2016)Chen, Dyreng, and Li (2015) Faccio (2016)Martinez (2017)Hill et al. (2013)Richter et al. (2009)Alexander et al. (2009)Gardner and Whamhoff (2021)

One hundred top companies in the US paid zero or less in federal income taxes in at least one year from 2008 to 2015.

Signalling of a non negative or positive correlation: Drope and Hansen (2008)Cao et al (2014) Mills et al. (2013)Northcut and Vines (1998)Also the work of Aggarwal and Wang (2012)Bronars and Lott Jr (1997)

Lobbying

Element of intrest for companyes

the Lobbying activity can be seen as an investment for many firms. There are several reasons behind the decision to porsue a political pressure These reasons can be either good or bad for most of the people (in terms of pareto efficiency), but the role of the delegated office is to give the perspective of doing good in both eventualityes

• Stakeholders and shareholders have a big interest in ESG (Environmental, Social, and Governance) themes.

• Lobbying represent a way companies aim to influence regulations that impact sustainability practices, manage reputational risks, and meet investor demands alternatively seen as ESG parameters.

• Stakeholders and shareholders keep under scrutiny companyes that lobby more.

• Accelerated Depreciation: Claiming larger deductions earlier to reduce current tax liability.
• Stock Options: Receiving company stock at a discounted price, potentially avoiding income tax.
• Tax Credits: Directly reducing tax owed, often for specific activities like research and development.
• Offshore Profit-Shifting: Moving profits to low-tax jurisdictions to reduce overall tax burden.
• Arbitrage Bonds: Exploiting price differences in similar bonds to profit without significant risk.
• Cross-Border Arbitrage: Taking advantage of price discrepancies across different markets.
• REITs: Investing in real estate through a trust, potentially reducing individual income tax.
• Municipal Bonds: Investing in bonds issued by state or local governments, often tax-exempt.
• Captive Insurance Companies: Setting up a private insurance company to self-insure, potentially reducing premiums and taxes.
• Interest Rate Swaps and Derivatives: Financial instruments used to manage risk and potentially reduce taxes.
• Like-Kind Exchanges: Exchanging property for similar property, deferring capital gains taxes.
• Tax-Advantaged Retirement Accounts: Investing in retirement accounts with tax benefits, like 401(k)s and IRAs.
• Tailored Instruments: Creating financial instruments specifically designed to reduce taxes for a particular company or industry.

Tax avoidance strategies

• Tax Credits
• Accelerated Depreciation
• Stock Options
• Offshore Profit-Shifting
• Arbitrage bonds
• Cross-Border Arbitrage
• Real Estate Investment Trusts (REITs)
• Municipal Bonds
• Captive Insurance Companies
• Interest Rate Swaps and Derivatives
• Like-Kind Exchanges
• Tax-Advantaged Retirement Accounts
• Instruments Tailored to Specific Companies and Industries