Do Auditor-Provided Tax Services Influence Long-Term Effective Tax Rates? New Evidence

Abstract

The research investigated the temporal association between investment in auditor-provided tax services (APTS) and the long-term effective tax rate (ETR). We used a panel data approach (static and dynamic), quantile analysis, and non-linear and non-parametric models to analyze the relationship between ETR and APTS based on public data from a sample of companies listed on the São Paulo Stock Exchange (B3) from 2013 to 2020. Overall, our results suggest that long-term ETR varies negatively due to the increase in the value of investments in APTS. Our analysis considered a series of controls predicted by the literature and is robust when different econometric specifications and alternative ways of calculating APTS and ETR are applied. In addition, we find that firm-year observations below/above the median ETR have a statistically positive/negative association with APTS, identify the point at which the positive relationship becomes negative, and document some evidence of non-linearity in the relationship between long-term ETR and APTS. Our results contribute to expanding the literature on the determinants of long-term ETR variation, studies investigating the auditor's role in corporate tax strategies and may be of interest to audit committee members when considering the costs and benefits of investing in APTS, to tax authorities, shareholders and regulators interested in understanding how APTS influences companies' ability to avoid paying taxes in the long term by reducing ETR, as well as providing input to the ongoing debate on the regulation of non-audit services that can be provided by the incumbent auditor.