Incentives and strategic interactions in tax compliance games under uncertainty

In this project we aim at analyzing how the strategic interactions in a tax compliance game are affected by the interplay of different kinds of accounting information, by the players’ incentive structures, and by uncertainty regarding the preferences of the other players.

We first investigate how the tax auditor’s auditing strategy and the firm’s tax evasion incentives depend on the information content of the accounting signals available to the players in the game. For example, besides the tax report, the tax auditor might know the firm’s financial statements, the audit report by the statutory auditor, or both pieces of information before he decides about his auditing effort. However, the tax auditor and the firm are not the only strategic players we consider in the game. The statutory auditor will be regarded as a strategic player as well. Furthermore, we should assume that within the firm a manager is responsible for filing the tax report and the financial statements on behalf of the firm. In addition, the manager can choose between several accounting systems, e.g., a more or less conservative one. The incentives of the manager, however, are not necessarily compatible with the interests of the firm, but depend on her incentive contract. Thus, we need to include a principal-agent-problem into the analysis.

In this project we intent to show how the manager’s incentives for both, tax and financial statement valuation, influence the firm’s disclosure of accounting information and how this affects the equilibrium auditing behavior of the tax auditor and the tax efficiency. In addition, we analyze how the availability of different pieces of accounting information at different points in time as well as the structure of the firm’s internal and external accounting system impact the efficiency of the tax audit.

Methodically we will use game theory, principal-agent theory and laboratory experiments in the project to investigate our research questions. We explicitly address that in reality the players in the game mutually do not know their opponents’ objective functions with certainty (for example the auditing costs of the tax auditor or the incentive contract of the manager are not known for certain by the other players). Therefore, in contrast to the standard approach, a main feature of this project is that we introduce uncertainty when modelling the preferences of the players. One possible way to do this is to assume that all players have common priors with regard to the objectives of the other players. Observed information in connection with rational beliefs about the players’ strategic actions then lead to a revision of the priors. Alternatively, we could leave the classic Bayesian learning model and develop a model that captures learning under ambiguity with regard to the objective functions.

Leitung: Prof. Dr. Kay Blaufus, Prof. Dr. Jens Robert Schöndube, Prof. Dr. Stefan Wielenberg

When do firms use one set of books in an international tax compliance game?

In this project we aim at examining how a strategic tax auditor affects a multinational firm’s transfer pricing in an incomplete information tax compliance game. Our model uses a divisionalized firm, in both a low-tax and a high-tax country, that decides to implement a transfer-pricing regime with either one or two sets of books. After observing its unit costs, the firm reports a compliant or non-compliant tax transfer price.

In a regime with one set of books, the single transfer price coordinates the quantity decision and determines the tax payments. In a regime with two sets, different transfer prices serve those tasks. In contrast to previous studies, our analysis incorporates a strategic tax auditor, who observes the tax transfer price and decides whether to audit the firm. Real-world regulations suggest larger penalties for detected non-compliance under a two-sets-of books transfer-pricing regime. Our analysis identifies the mixed strategy equilibria and examines how variations in the tax regulation affect the firm’s tax aggressiveness. We show that a firm acts less tax aggressively with a higher tax rate difference. Additionally, the model predicts that the firm either increases or decreases the probability of keeping one set of books for a smaller penalty advantage.

Leitung: Dr. Rebecca Reineke, Dr. Katrin Weisskirchner-Merten und Prof. Dr. Stefan Wielenberg

The effect of firms’ tax control frameworks on tax managers and auditors’ decision-making

Due to the ambiguity of tax law, firms often do not have precise information regarding the correct interpretation of tax law. To cope with tax uncertainty, firms can implement tax control frameworks (TCF). We aim at examining (i) how tax uncertainties are measured by firms TCFs, (ii) how the strength of the TCF affects managers’ tax planning behavior, and (iii) how TCFs affect decisions of tax auditors.

Leitung: Prof. Dr. Kay Blaufus, Prof. Dr. Jens Robert Schöndube