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Labor Tax Avoidance and Its Determinants: The Case of Mafia Firms in Italy

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Abstract

This paper develops two new measures of labor tax avoidance (LTAV) based on social contribution expenses reported in financial statements and tests them and their determinants within a sample of 224 Italian firms defined as legally registered Mafia firms (LMFs) due to having been confiscated at some point by judicial authorities, in relation to alleged connections with Italian organized crime. Overall, our results reveal that before confiscation LMFs engage more in LTAV than lawful firms do, whereas after confiscation there is no significant difference between both types of firm. Furthermore, we find that several factors have a significant influence on the probability of engaging in such a practice. This study can enhance further research on the effectiveness of our measures and on the determinants of LTAV in other contexts and for other types of firms. Moreover, these measures can be added to the other direct and indirect methods commonly employed to measure and detect undeclared work representing a primary means of LTAV. Finally, our study allows inferring conclusions on the relation between corporate social responsibility and tax avoidance, suggesting that socially irresponsible firms, such as LMFs, are more likely to adopt this practice.

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Author information

Authors and Affiliations

  1. Facultat d’Economia i Empresa, Universitat de Barcelona, Av. Diagonal 690, 08034, Barcelona, Spain

    Diego Ravenda & Josep M. Argilés-Bosch

  2. ESADE Business School, Av. Pedralbes 60-62, 08034, Barcelona, Spain

    Maika M. Valencia-Silva

Authors
  1. Diego Ravenda
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  2. Josep M. Argilés-Bosch
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  3. Maika M. Valencia-Silva
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Correspondence to Diego Ravenda.

Appendix

Appendix

Definition of Variables of the Base Regression Model (Eq. (4))

  • LTAV_PROXY = ABSOC1, P_ABSOC1, N_ABSOC1, ABSOC2, P_ABSOC2 , or N_ABSOC2:

    • ABSOC1  = Abnormal SOCs equal to estimated residual from Eq. (1)

    • P_ABSOC1 = Positive ABSOC1

    • N_ABSOC1 = Negative ABSOC1

    • ABSOC2 = Abnormal SOCs equal to estimated residual from Eq. (2)

    • P_ABSOC2 = Positive ABSOC2

    • N_ABSOC2 = Negative ABSOC2

  • CRIME1 = Dummy variable taking value of 1 for LMFs before confiscation and 0 otherwise

  • CRIME2 = Dummy variable taking value of 1 for LMFs after confiscation and 0 otherwise

  • SIZE = Natural logarithm of total assets in thousands

  • LEVLONG = Long-term debts divided by total assets

  • CAPINT = Net property, plant and equipment, and net intangible fixed assets divided by total assets

  • INVTA = Inventory divided by total assets

  • ROA = Income before tax divided by total assets

  • GROWTH = (Total assets − lagged total assets)/lagged total assets

  • CH_REC = (Receivables − lagged receivables)/lagged total assets

  • CH_INV = (Inventory − lagged inventory)/lagged total assets

  • ABMAT = Abnormal material expenses equal to residuals from Eq. (3)

  • LNGDP = Natural logarithm of regional GDP per capita (source ISTAT)

  • LOSS = Dummy variable that takes a value of 1 if the firm had two or more consecutive years of negative income including the current and 0 otherwise

  • ETR = Current tax expense divided by income before tax

  • INDSEC = Dummy variables representing industry defined by the two-digit SIC code

  • YEAR = Dummy variables representing the fiscal year

Abbreviations

ABSOCs:

Abnormal social contribution expenses

ANBSC:

Agenzia Nazionale Beni Sequestrati e Confiscati

CFO:

Cash flow from operations

CSR:

Corporate social responsibility

ETR:

Effective tax rate

FTE:

Full-time employed

ISTAT:

ITALIAN Statistical Institute

ITAV:

Income tax avoidance

LA:

Legal Administration

LMF:

Legally registered Mafia firm

LTAV:

Labor tax avoidance

LWF:

Lawful firm

NSOCs:

Normal social contribution expenses

SRL:

Società a responsabilità limitata

SOCs:

Social contribution expenses

TAV:

Tax avoidance

UDW:

Undeclared work

VAT:

Value-added tax

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Ravenda, D., Argilés-Bosch, J.M. & Valencia-Silva, M.M. Labor Tax Avoidance and Its Determinants: The Case of Mafia Firms in Italy. J Bus Ethics 132, 41–62 (2015). https://doi.org/10.1007/s10551-014-2304-7

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