An economic analysis of joint tax audits

Daniel Dyck, Thomas Kourouxous and Johannes Lorenz

No 305, arqus Discussion Papers in Quantitative Tax Research from arqus - Arbeitskreis Quantitative Steuerlehre

Abstract: We investigate how tax authorities use joint tax audits as a coordinated enforcement tool in cross-border transactions of a multinational firm. Joint tax audits aim to resolve potential tax disputes early, before such disputes escalate into costly and time-consuming resolution procedures that may not fully eliminate double taxation. Employing a game-theoretic model, we identify settings in which we expect joint audits to occur and investigate their effect on the firm's expected tax payments and tax audit efficiency. We find that the occurrence of joint audits critically depends on the double taxation risk in the absence of joint audits. Unless tax rules are consistently applied, joint audits can occur more often when this risk is higher. The reason is that the firm changes its income-shifting strategy to reduce its expected tax payments, and thereby also enables tax authorities to better target tax disputes via joint audits that would otherwise escalate. However, we identify conditions under which joint audits are then detrimental to tax audit efficiency, particularly when the firm prefers them most. Our results imply that cost-sharing arrangements for joint audits should be tailored to the level of double taxation risk, with firm involvement having the potential to improve efficiency when this risk is high.

Keywords: joint tax audits; double taxation; dispute prevention; income shifting (search for similar items in EconPapers)
JEL-codes: C72 F23 H26 H87 M42 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-acc, nep-gth, nep-iaf, nep-iue and nep-pbe
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