Pandemic and tax avoidance: Cross-country evidence

Tax avoidance is appealing to firms since it increases their cash flow by reducing tax payments, which can then be used to expand operations and invest in research and development. The existing literature explores numerous factors that contribute to firms' tax avoidance behavior, but it fails to consider the impact of a pandemic. Based on a sample of 42 countries between 1989 and 2020, we investigate the relationship between pandemic presence and firms' tax avoidance activities. We find that tax avoidance activities increase during pandemics, which is reflected in decreased effective tax rates (ETRs). Furthermore, this influence is strengthened by adopting International Financial Reporting Standards and societal trust level. Channel analysis shows that the findings are realized through worse firm performances, reduced economic growth, lower country-level stability, and more interest obligations. These findings offer up-to-date perspectives and recommendations to policymakers in crafting suitable and effective schemes for post-pandemic recovery.