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Journal of International Accounting, Auditing and Taxation 41 (2020) 100339Contents lists available at ScienceDirect
Journal of International Accounting,
Auditing and Taxation
An empirical examination of the influence of e-commerce on
tax avoidance in Europe
Josep M. Argilés-Bosch a,∗ , Antonio Somoza b , Diego Ravenda c ,
Josep García-Blandón d
a
Department of Business, Universitat de Barcelona, Avda. Diagonal 696, Planta 3. 08034 Barcelona, Spain
b
Department of Business, Universitat de Barcelona, Avda. Diagonal 696, 3. 08034 Barcelona, Spain
c
Department of Management Control, Accounting and Auditing, Toulouse Business School in Barcelona, C. Trafalgar 10. 08010
Barcelona, Spain
d
Faculty of Economics, IQS, Universitat Ramon Llull, Via Augusta 390. 08017 Barcelona, Spain
a r t i c l e i n f o a b s t r a c t
Article history: This paper reports an empirical analysis of the influence of e-commerce business practices
Available online 26 August 2020 on tax avoidance. Using a sample of European parent firms in the retail trade industry from
22 different countries, we find empirical evidence that e-commerce firms are significantly
more tax avoidant than traditional firms. However, as the latter have increasingly sought
to avoid paying taxes over the period studied, the gap between the two firm types has
Keywords: been reduced. Our results are robust to different specifications of tax avoidance, time, and
Tax avoidance sample selection criteria.
Tax aggressiveness
© 2020 Elsevier Inc. All rights reserved.
E-commerce
Electronic commerce
Retail industry
Europe
1. Introduction
We analyze the influence of e-commerce business practices on tax avoidance1 , motivated precisely by the ongoing debate
on the opportunities afforded by e-commerce for tax avoidance. Concerned by the strain placed on the international tax
framework by the increasing integration of national economies and markets, the Organization of Economic Cooperation
and Development (OECD) and G20 countries published their explanatory statement on the Base Erosion and Profit Shifting
(BEPS) Project in 2015. BEPS refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially
shift profits to low or no-tax locations. According to the statement issued, the digital economy has exacerbated the risks
∗ Corresponding author.
E-mail addresses: josep.argiles@ub.edu (J.M. Argilés-Bosch), asomozal@ub.edu (A. Somoza), dravenda@hotmail.com (D. Ravenda),
josep.garcia@iqs.url.edu (J. García-Blandón).
1
Some authors (e.g. Hasseldine & Morris, 2013; Kirchler, Maciejovsky, & Schneider, 2003; Lanis & Richardson, 2015) distinguish between tax avoidance
and tax evasion, the former encompassing tax planning activities that are legal or which fall into a gray area, and the latter involving illegal activities.
However, others do not consider this distinction relevant, because most tax avoidance transactions are technically legal, and because the legality of some
transactions is often determined after the fact (Hanlon & Heitzman, 2010). The latter define tax avoidance very broadly as a continuum of tax planning
strategies, with legal actions at one end, and evasion or illegal activities at the other (Hanlon & Heitzman, 2010, p. 139). Some empirical studies of tax
avoidance explicitly consider this broad spectrum of tax planning strategies and activities (e.g. Brown et al., 2016; Christensen et al., 2015), while others
merely employ the term without entering into a discussion of its meaning. In this paper, we use tax avoidance in this broad sense.
https://doi.org/10.1016/j.intaccaudtax.2020.100339
1061-9518/© 2020 Elsevier Inc. All rights reserved.
,2 J.M. Argilés-Bosch, A. Somoza, D. Ravenda et al. / Journal of International Accounting, Auditing and Taxation 41 (2020) 100339
of BEPS (OECD/G20, 2015b). Consequently, the OECD and G20 countries developed and implemented the so-called BEPS
package aimed at laying the foundations of a modern international tax framework, under which profits are taxed where
economic activity and value creation occurs. Action 1 of this package addresses the tax challenges of the digital economy.
Likewise, various countries and tax jurisdictions, including the United States (US), the European Union (EU), and India,
have developed their own initiatives to deal with the challenges posed by electronic commerce and the taxing of the digital
economy. The recent EU Commission ruling in a case that saw Ireland granting undue tax benefits of up to D 13 billion to
Apple (European Commission, 2016) has given renewed attention to the relationship between tax avoidance and the digital
economy. The EU Commission concluded that Apple was setting up their sales operations in Europe in such a way that
customers were contractually buying products from Apple Sales International in Ireland, rather than from the shops that
physically sold the products to customers. The EU Commission is still investigating other similar tax rulings (Wessel, 2016).
Electronic commerce or e-commerce is the trading or facilitation of the trading of products or services using computer
networks, such as the internet or online social networks (Buettner, 2017). Since its inception, the development of e-commerce
has enabled firms to circumvent conventional stages of taxation in multiple jurisdictions (Frecknall Hughes & Glaister,
2001). E-commerce firms have the advantage that location does not condition their activity to the extent that it does that of
traditional firms with physical locations. Given that a permanent establishment is not required (Yapar, Bayrakdar, & Yapar,
2015), the internet environment facilitates the allocation of transactions to the most convenient jurisdiction to save taxes.
As such, cost minimization through tax avoidance is the expected behavior of these firms.
Research on tax avoidance has advanced dramatically in recent years, but research on its association with the digital
economy remains scarce. The relationship between taxes and e-commerce has been analyzed using different approaches
in related fields, including law and public economics. For example, Hale and McNeal (2011) perform an empirical analysis
of interstate and government practices in the US to tackle the taxation difficulties that typify e-commerce. The impact of
e-commerce on the loss in revenue from sales taxes in the US has also been studied using aggregate data (Alm & Melnik,
2010; Bruce & Fox, 2000). Alm (2012) claims that tax avoidance in on-line commerce is especially important in the case of
cross-border transactions.
E-commerce has increased dramatically in recent years, usually as a consequence of strategic business decisions and its
perceived advantages over traditional commerce in terms of factors such as economic and information efficiency, coordina-
tion, and market impact. To the best of our knowledge, no empirical study has found firms reporting that they actually opt
for e-commerce in a deliberate attempt to avoid paying taxes.
It could be argued that e-commerce has no influence on tax avoidance, that it is a strategic business model based on sound
economic tenets facilitated by the technological possibilities of the digital era, where tax avoidance may, or may not, be a mere
sporadic and unintended by-product of this business model. There are even some authors who identify the beneficial effects
of this type of business for tax collection at an aggregate level. Emamverdi, Karimi, Shahkaram, Naseri and Hajmousavi (2013)
report that the development of e-commerce is associated with increasing tax revenues in developing countries. However,
this is probably not the true influence of e-commerce, but rather an indirect effect of a country’s economic growth thanks
to e-commerce. The most common concern among academics and policymakers is that e-commerce creates conditions that
favor tax avoidance.
Yet, studies conducted from a business or accounting perspective on the influence of e-commerce on tax avoidance remain
scarce. To the best of our knowledge, there is virtually no empirical research testing the existence of an economic advantage
for e-commerce firms, with respect to traditional retail firms, in relation to corporate tax avoidance. Hoopes, Thornock and
Williams (2016) deal with value added taxes (VAT), but not with corporate tax. They find empirical evidence of the existence
of a competitive tax advantage for e-traders with respect to traditional retail firms. They infer this influence from market
reactions to changes in legislative proposals, but they do not use explicit tax measures for traditional and e-commerce retail
firms. Klassen, Laplante and Carnaghan (2014) find an interaction effect between e-commerce and foreign income on tax
avoidance. However, their study is more concerned about firms with high levels of foreign income than with the impact of
e-commerce, and their analysis focuses on business-to-business (B2B) e-commerce transactions. In contrast, in our study we
analyze firms that sell exclusively via business-to-consumer (B2C) e-commerce transactions. It is our contention that this
provides a more focused analysis of the effects of e-commerce on tax avoidance, given that e-commerce is the core business
of these firms. Moreover, we analyze all firms independently of their level of foreign income.
Europe is an exceptionally interesting setting for analyzing tax avoidance, given that most countries have experienced a
considerable decrease in statutory and effective corporate tax rates, as well as the introduction of tax exemptions following
the expansion of the EU in terms of both its membership and the size of its economic zone. Indeed, individual member
state governments have specifically implemented such measures in order to compete with the more favorable tax and wage
conditions of the EU’s newer members (Fuest, Perichl, & Siegloch, 2015; Genschel, Kemmerling, & Seils, 2011; Overesch &
Rincke, 2011). Moreover, the European context provides an interesting multinational setting for this analysis.
Using AMADEUS, this study draws on a sample of consolidated accounting financial statements published by European
retail firms from 22 different countries. We find that e-commerce firms are significantly more tax avoidant than traditional
firms. Over the period studied, they avoided around 5 percentage points more of corporate taxes than traditional retail firms.
However, as the latter have increasingly sought to avoid taxes, the gap between the two firm types has been reduced, and,
as a result, e-commerce firms have progressively lost their former competitive advantage as regards tax avoidance. Various
factors may have contributed to reduce this differential tax behavior, including the cut in statutory corporate tax rates in
most countries, the increasing importance of intangible assets and multinational trade in all types of firm, and a learning
, J.M. Argilés-Bosch, A. Somoza, D. Ravenda et al. / Journal of International Accounting, Auditing and Taxation 41 (2020) 100339 3
effect whereby traditional firms are adopting e-commerce and behaving in a tax avoidant manner. Our results are robust to
different specifications of tax avoidance, time, and sample selection criteria.
Our study makes several contributions to the published literature on tax avoidance. First, it contributes to what is an
almost non-existent business literature on the association between e-commerce and tax avoidance. Second, we shed light
on tax avoidance in the European context, which, despite being an exceptionally interesting setting for such an analysis, has
been considerably less studied than the US context in empirical studies on tax avoidance. Finally, we are able to describe
the trend taken by the tax avoidance behavior of these firms in recent years in Europe.
The rest of this paper is organized as follows. Following on from this introduction, we present, first, the hypotheses
motivating the study; second, an explanation of the research methods; and, third, an overview of sample selection. We then
present and discuss our results, and finally, offer our concluding remarks.
2. Hypotheses development
Basu (2007, p.104–105) claims that in taxation you first have to identify the tax base and then enforce the tax; yet, the
anonymity and mobility associated with e-commerce complicates both of these tasks. In e-commerce, the possibilities of
concealing a transaction are enormous, while the possibilities of identifying the parties to a transaction are, more often than
not, almost non-existent. Basu goes onto argue that the two prevailing approaches to direct taxation, source- and residence-
based, are more elusive in the context of e-commerce. The former requires that authorities determine the geographical
source of income, while the latter requires information about the identity and residency status of those engaged in income-
producing activities. However, e-commerce breaks down any clear connection between territory and commerce, and makes
this type of information more difficult to obtain, thus, complicating the task of taxing income based on source or residence
(Basu, 2007, p. 108–110).
Tax enforcement is also more difficult in the e-commerce environment because the residence-based approach favors
the possibility of basing activities in off-shore locations, which makes tax withholding more difficult and favors tax evasion
(Cockfield, 2001). A company only needs to incorporate itself in a tax haven and then control and supply its business
operations from another country. Moreover, if we take into account the empirical evidence showing that multinational
firms allocate profits according to differences in statutory corporate tax rates (Huizinga & Laeven, 2008), e-commerce firms
will find even greater opportunities to behave in this way.
E-commerce exacerbates the problems associated with the interrelation of a variety of disparate tax systems (Li, 2003),
while electronic transactions highlight the complexities concerning the principles of taxation. As international taxation can-
not be considered in isolation from national tax laws, in the case of e-commerce it becomes especially difficult to determine
how, where, and by whom income is earned, and consequently where to allocate the tax jurisdiction. Many problems have
to be considered, including the country in which the company has its headquarters, the physical servers that host its web
domain and online presence, where the effective management operates, where the office processed the order, and where
the product(s) or service(s) are delivered. Due to the increased use of information and communication technologies, it has
become more and more difficult to identify the source of income, and moreover the source is increasingly susceptible to
manipulation or obfuscation (Schäfer & Spengel, 2002).
A further issue of relevance is the characterization of income, because, in accordance with international tax rules, different
types of income are taxed differently. In e-commerce, the proper characterization of transactions with respect to things such
as products, services, royalties, rents, and use licenses is a task fraught with significant difficulties (Basu, 2007; Li, 2003;
Tadmore, 2004). This issue is especially crucial for VAT authorities. Digitalized products downloaded from a site outside the
EU may generate no tax revenue or liability for VAT reimbursement (Basu, 2007). In these circumstances, businesses develop
and advance considerable tax strategizing efforts. Basu (2007) identifies clear incentives to move internet service provider
(ISP) activities offshore so as to “blur responsibility” for paying or collecting VAT, and indeed some European ISP activities
are set up in low-tax jurisdictions. The loss of tax revenues in the US is widely studied (Alm & Melnik, 2010; Bruce & Fox,
2000).
Hoopes et al. (2016) argue that internet purchasing is a means of evading sales taxes, and after events that indicate an
increased likelihood of federal sales tax legislation, report empirical evidence of abnormal stock returns for ‘e-tail’ firms. They
suggest that this points to the existence of a competitive advantage for e-commerce retail firms with respect to traditional
retail firms, and is attributable to the ease with which they can engage in tax evasion practices. Likewise, Klassen et al. (2014)
report empirical evidence that e-commerce reduces the costs of income shifting to favorable tax jurisdictions.
Transfer pricing is a well-known method of tax avoidance. In e-commerce, tax avoidance practices are characterized by the
fact that elements of taxation can be easily changed or moved. Digital products and services tend to be highly integrated and
intangible in nature, as well as difficult to value. In this regard, e-commerce presents increasing difficulties for governments
to detect the use of transfer pricing for the purposes of tax avoidance (Basu, 2007, p. 135). Cockfield (2001) argues that
e-commerce exacerbates many of the problems associated with international transfer pricing.
Given the possibilities that e-commerce benefits from extant loopholes in the international tax system, we formulate the
following hypothesis:
H1. E-commerce business practices influence higher rates of tax avoidance.
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