International Business Review 22 (2013) 100–111

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International Business Review

jo u r nal h o mep age: w ww.els evier .c o m/lo c ate / ib us r ev

Ethics and taxation: A cross-national comparison of UK and Turkish firms

Mehmet Demirbag a,*, Jane Frecknall-Hughes b,1, Keith W. Glaister a,2, Ekrem Tatoglu c,3

a Management School, University of Sheffield, 9 Mappin Street, Sheffield, S1 4DT, United Kingdomb The Open University Law School, Walton Hall, Milton Keynes, MK7 6AA, United Kingdomc Faculty of Economics and Administrative Sciences, Bahcesehir University, Besiktas, Istanbul 34349, Turkey

A R T I C L E I N F O

Article history:

Received 4 May 2011

Received in revised form 7 January 2012

Accepted 24 February 2012

Available online 2 April 2012

Keywords:

Cross-national comparison

Ethics

Taxation

Turkey

UK

A B S T R A C T

This paper investigates responses to tax related ethical issues facing firms, an area where

there has been little prior research. As perceptions may be determined by response to

different legal systems and regulations, we examine responses to a series of ethical

questions posed to two groups of tax practitioners, one group employed in UK firms and

another group employed in Turkish firms. This facilitates both an examination of responses

from within each country and a cross-national comparison of ethics and taxation. Although

there is a similarity of perception of the importance of a number of taxation related ethical

issues between UK practitioners and Turkish practitioners, there are also several

statistically significant differences between the two groups. The paper makes a significant

contribution to the literature through obtaining and analysing data from tax professionals

in the UK and Turkey to provide a cross-national study of corporate tax practice and ethics.

The paper is novel in that no prior studies have reported cross-national studies that have

examined tax issues related to firms.

� 2012 Elsevier Ltd. All rights reserved.

1. Introduction

Ethical issues related to corporate tax decisions have been under-researched in the business and management literature.This is surprising because ethical dilemmas involving tax issues in particular were identified some time ago by members ofthe American Institute of Certified Public Accountants as presenting the most difficult problem for them (Finn, Chonko, &Hunt, 1988, pp. 607–609). More recently there have been high profile scandals, such as the KPMG tax shelter fraud case(Herman, 2004; Johnston, 2004; Scannell, 2005), which have highlighted problems caused by differences in ethicaljudgements among corporate decision makers. Nevertheless, studies which examine systematically tax decision makingprocesses are rare (see Glaister & Frecknall-Hughes, 2008), and, to the best of our knowledge, there are no prior studies whichexamine such issues from a cross-national perspective. The purpose of this paper is to make a contribution by examining tax-related ethical issues facing firms in two different national contexts. The study examines responses to a series of ethical taxrelated questions posed to a sample of UK and Turkish corporate respondents. These two countries were chosen as theyprovide good examples of legal and commercial frameworks and institutions that are at different stages of development,with the UK being a mature market economy and Turkey being an emerging one. In addition, the systems of each country are

* Corresponding author. Tel.: +44 (0) 114 2223441.

E-mail addresses: m.demirbag@sheffield.ac.uk (M. Demirbag), j.frecknall-hughes@open.ac.uk (J. Frecknall-Hughes), k.glaister@sheffield.ac.uk

(K.W. Glaister), ekrem.tatoglu@bahcesehir.edu.tr (E. Tatoglu).1 Tel.: +44 (0) 1908 332565.2 Tel.: +44 (0) 114 2223362.3 Tel.: +90 (0) 212 3810459.

0969-5931/$ – see front matter � 2012 Elsevier Ltd. All rights reserved.

doi:10.1016/j.ibusrev.2012.02.007

M. Demirbag et al. / International Business Review 22 (2013) 100–111 101

well known to the authors. The study serves to facilitate an examination of responses from within each country, but, moreimportantly, it allows a cross-national comparison of ethics and taxation, and makes a significant contribution in theprovision of cross-country information on company tax matters.

Processes and procedures to determine a company’s tax liabilities are imposed by law. Where taxpayers (corporate orotherwise) wish to pay less than a government requires, a conflict arises, long recognised, between the right of citizens toown property (including goods and money) which militates against the right of government to allow that right of ownershipand/or to take away that property in the form of taxation (Locke, 1690). This conflict manifests itself as tax evasion, which isillegal, or tax avoidance, which is legal. Although tax avoidance is legal, it is often regarded as unethical, for example, by theUK Revenue authorities, and is something of which firms (especially multinational enterprises (MNEs)) are often accused(Christensen & Kapoor, 2004; Christensen & Murphy, 2004; Freedman, 2004; Mitchell & Sikka, 2005; Mitchell, Sikka,Christensen, Morris, & Filling, 2002; Reed, 2007). Given that tax evasion is illegal, this paper focuses on the area of taxavoidance, where there is no legal certainty to determine where the line is drawn between what is or is not acceptable.

Considering corporate taxes, a particular issue that has attracted significant criticism is that of ‘unacceptable taxavoidance’ (Wyman, 1997, p. 3). This is a term that tax authorities apply to the use of specially developed schemes, oftenaggressive in nature, which either stretch the word of the law beyond its intention or manipulate events/facts so that the lawapplies (in a way not intended) to artificially created truths, events or circumstances. The suggestion implicit in the use of theword ‘unacceptable’ compounds the idea that such tax avoidance activity is unethical (see Freedman, 2004) as it reduces theoverall tax revenue for governments and thus the funds available for spending for societal purposes. Although tax avoidanceremains a legal activity, because of the link with unacceptable behaviour it has become tainted by association, which isarguably deliberate on the part of tax authorities.

The situation is made more complex in that views have often differed as to what constitutes tax avoidance, and suchviews may change over time. The meaning of ‘unacceptable avoidance’ remains a hotly debated topic. One view is that anydecision ‘‘comes down to a matter of personal judgment. One man’s idea of acceptable tax planning is undoubtedly anotherman’s idea of criminally subversive activity’’ (Gillett, 1999, p. 1). Others think that there is no problem here at all and that‘‘tax avoidance is a conceptual anomaly that exists in the mind of those whose sense of morality is violated by certaineffective tax practices’’, occurring ‘‘where legislative intention and policy miscarried and failed to anticipate and reach thetransaction under consideration’’ (Orow, 2004, p. 415).

For any study examining the behaviour of firms in relation to taxation, it is therefore essential to establish how importantobeying the law is, and whether it is acceptable to challenge the law by use of avoidance schemes which tax authoritiesmight deem inappropriate, and also whether, as a corollary, firms will be concerned about the impact of their taxationactivities on their reputation.

The rest of the paper is set out as follows. Section 2 reviews literature relating to differences between Turkey and the UK inrespect of issues relevant to tax. The section then considers ethics and tax issues affecting firms, in order to providebackground to the study and to help generate the study’s basic research questions. Research methods are in Section 3.Section 4 provides findings and discussion. The conclusion is in Section 5.

2. Review of the literature

2.1. Turkey and the UK – issues relevant to tax

Developments regarding taxation in emerging countries are often unclear because the relevant academic literature isrelatively scarce. This applies to the emerging economy of Turkey, which may be contrasted to the UK, a mature marketeconomy that possesses one of the most voluminous and sophisticated tax codes in the world. Typically, emergingeconomies have less well defined tax laws (Demir, 2005), and this appears to be the situation in Turkey. Although Turkey hasmany of the same underlying concepts of tax as the UK (for example, a system of direct taxation of income, corporate profitsand capital gains, as well as indirect taxation), there is much less depth, sophistication and complexity in terms of law. Also,Turkish law has a reputation for loopholes (World Bank, 2008), which can be exploited.4 Where law is so characterised, it isoften easier to find ways of ‘getting round’ it, which are less likely to be challenged by government authorities, and Turkey isknown for the use of avoidance mechanisms. Menguc (1998) and Ekin and Tezolmez (1999), both cited by Hisrich, Bucar, andOztark (2003, p. 8), comment on a range of ethical problems being reported in Turkey, including ‘‘bribery, tax evasion, insiderdealing and deceptive practices’’, which is supported by the findings of Rawwas, Swaidan, and Oyman (2005). In contrast,however, McGee and Tyler (2006) suggest that there is generally an aversion to tax evasion in Turkey.

Business structures in Turkey also tend to be different from those of the UK, dominated by concentrated national family-based ownership, not globally operating firms or MNEs (Ararat & Ugur, 2003, pp. 59, 62). Even listed companies in Turkey areoften characterised by having a holding company controlled by a family. Turkey is also very different from the UK in terms ofits religious and administrative heritage and historical development (Glaister, Dincer, Tatoglu, & Demirbag, 2009). We positthat key issues regarding different perceptions of taxation related ethical issues between the UK and Turkey will be

4 There is no scope in this paper for a detailed overview of the Turkish and UK tax systems, especially given the voluminous nature of UK tax statutes,

which run to many thousands of pages. However, a general appreciation of the two systems can be obtained from the overview entitled ‘Turkish Taxation

System’ provided by the Turkish Revenue authority and the IFS Publication ‘A Survey of UK Tax System’ by Adam and Browne (2011).

M. Demirbag et al. / International Business Review 22 (2013) 100–111102

associated with such factors as the different stages in the development of the economy (the UK is an advanced marketeconomy, Turkey is an emerging economy), different business structures (fewer global firms and more smaller familybusinesses in Turkey compared with the UK), a less visible use of tax advisers in Turkey compared with the UK, and differenttax emphasis, seen, for example, in the greater use of tax breaks and incentives to encourage business development,especially in particular areas or industries, for which companies may actively lobby in Turkey compared with the UK. The UKand Turkey in this study thus act respectively as proxies for a typical well developed economy and a developing one. Theremay be the same ethical ‘ingredients’ in both countries, but they could logically be expected to carry different weightings andmay show tax beliefs in sharp contrast, or even in conflict. If this is so, then it is valuable to know, for example, for supra-national bodies such as the World Trade Organization or the Organisation for Economic Cooperation and Development intheir work towards harmonisation of tax systems and so on.

2.2. Ethics and tax issues affecting firms

In the context of taxation, ‘ethics’ is a term most commonly used to mean a set of practices demonstrating the applicationof generally accepted underlying values or principles–in other words ‘normative ethics’, which define what we ought to do orshould do.5 Song and Yarbrough (1978, p. 443) describe this as ‘‘the norms of behaviour governing citizens as taxpayers intheir relationship with the government’’. However, a formal ethical framework for taxation based on such norms ortheoretical philosophical principles has never been developed (though see Murphy, 2007). The only formal framework thatexists is law, which should, however, reflect underpinning beliefs of what is acceptable and what is not. Tax law is notdeveloped in accordance with specific philosophical principles, and although written, may not be able to cope with allpossible situations and may be subject to interpretation (philosophical or otherwise) and differ between differentjurisdictions.

Taxation affects many different groups of people. First there are taxpayers, their agents (tax advisers) and government,who are primary persons/entities involved in calculation, payment and collection of sums due. There is a further range ofstakeholders, especially from the perspective of firms, whose interest lies in the effects, on them personally and society morewidely, in terms of tax collected and the purposes to which it is put. Tax avoidance therefore can deprive certain stakeholdersof societal benefits, and in this context tax avoidance becomes a corporate social responsibility issue. Typical stakeholdersare shareholders, employees, customers, suppliers, regulatory authorities, the public at large, etc., who will be likely toapproach the subject from different, often conflicting, ethical perspectives, philosophies, beliefs, educational backgroundand so on. What one group of stakeholders find acceptable might not be acceptable to others. A programme of jobredundancies may be acceptable to shareholders if it cuts costs and increases profits, but employees, the government andpublic at large may find it unacceptable. If undertaken other than to ensure a firm’s survival, such a programme could beconsidered unethical.

There is a significant body of academic literature which has examined why some individuals are tax compliant, and sobehave ethically, and why some are not. Running counter to the idea that tax is unwelcome and that people are unwilling topay, Alm and Torgler (2006, p. 225) (following Frey, 1997) suggest that there is an ‘‘intrinsic motivation for individuals to paytax’’, even where evasion would be unlikely to be detected, which they term ‘‘tax morale’’ and which is

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‘‘likely to be influenced by such factors as perceptions of fairness, trust in the institutions of government, the nature offiscal exchange between taxpayers and government, and a range of individual characteristics’’.6

Alm & Torgler, 2006, p. 228

The idea of willing compliance with tax regulation, as evidenced by the studies of tax morale contrasts, however, withearlier, US studies, which suggest that taxpayers comply because they fear probable detection and severe penalties – referredto as deterrence theory (Allingham & Sandmo, 1972; Cowell, 1990; Grasmick & Green, 1980; Tittle, 1980).

A significant amount of academic literature on individual tax compliance has also centred on particularfactors, including non-economic ones, which affect the compliance behaviour of individuals (Hite & McGill, 1992, p.389). Again, this literature comprises predominantly American studies (for example, Fischer, Wartick, & Mark, 1992;Jackson & Milliron, 1986; Roth, Scholtz, & Witte, 1989; Weigel, Hessing, & Elffers, 1987). Tax compliance is considered theethical ‘thing to do’. This is supported by a large number of studies (see, for example, Alm, McClelland, & Schulze, 1999;

terms ‘ethical’ and ‘ethics’ are frequently used interchangeably with ‘moral’ and ‘morality’ without distinction of meaning throughout the literature

rea. While we acknowledge that there is a distinction between ethics and morality (see, for example, Singer, 1994, p. 5), in this paper we use ‘ethical’

hics’ as far as possible, except where directly quoting from sources.

and Torgler (2006, p. 228) go on to say: ‘‘Importantly, we argue that tax morale is likely to differ across countries because of cultural difference

hese countries’’. This is in the context of considering individuals, not corporate bodies. The studies which do look at the determinants of individuals’

ale (Weck-Hannemann, 1983; Frey & Weck-Hannemann, 1984; Weck, Pommerehne, & Frey, 1984; and Kirchgassner, 1999, cited by Alm and Torgler,

lso typically consider Western democracies with well-established economies (e.g., Alm and Torgler’s 2006 study looks at the USA and 15 European

es), not emerging economies. The main thrust of findings is that factors other than rational economic thought contribute towards taxpayers being

ant and having high tax morale (see also Torgler, 2002, p. 657). The determinants of tax morale used by Alm and Torgler (2006) are largely age,

, marital status, employment status, economic status (middle class, etc.), church attendance, trust in the legal system and trust in parliament. They

ignificant and systematic difference in tax morale across countries, reporting that there is a strong relationship between tax morale and trust, while

acts as a ‘supernatural police’.

M. Demirbag et al. / International Business Review 22 (2013) 100–111 103

Andreoni, Erard, & Feinstein, 1998; Bobek & Hatfield, 2003; Bosco & Mittone, 1997; Davis, Hecht, & Perkins, 2003; Erard &Feinstein, 1994; Hanno & Violette, 1996; Kaplan, Newberry, & Reckers, 1997; Pommerehne, Hart, & Frey, 1994; Porcano &Price, 1993; Posner & Rasmusen, 1999; Rhoades, 1997).

While considerable research has been reported on individual tax compliance, as is evidenced above, there is little by wayof cross-country comparison. Alm, Sanchez, and De Juan (1995) look at Spanish and American students in a laboratoryexperiment and Bobek, Roberts, and Sweeney (2007) consider evidence from Australia, the US and Singapore, but suchstudies are rare, other than those on tax morale (for example, Alm & Torgler, 2006). Studies which consider how companiescomply with tax law are conspicuously absent, though there is one UK based study on corporate tax risk and avoidance(Freedman, Loomer, & Vella, 2009). There is no work of which we are aware that considers cross-country comparisons interms of companies.

The key strategic decisions of corporate entities are often influenced by their tax implications. Firms with active businessoperations in more than one country, in particular, may be presumed to undertake their business transactions in accordancewith differences in international tax rules/rates. Hines (1999, p. 308) notes that international tax rules and the tax laws ofother countries have the potential to influence a wide range of corporate and individual behaviour, most obviously thelocation and scope of international business activity, but also domestic operations that are connected to foreign operationsthrough various international tax provisions.

There is a substantial literature that is devoted to measuring behavioural responses to international tax rules whichshows, for instance, that international taxation significantly influences the location of foreign direct investment (FDI),corporate borrowing, transfer pricing, dividend and royalty payments, and research and development (R&D) performance(Hines, 1999). For example, the pre-tax profitability of foreign affiliates is correlated negatively with host country tax rates(Hines & Rice, 1994), ‘‘which is suggestive of tax motivated transfer pricing and unlikely to be the outcome of ordinaryinvestment responses to tax rate differences’’ (Hines, 2001, p. 3).

At the same time practitioners are increasingly calling for companies to develop coherent tax strategies (Fay, 2004;McCormick, 2004). For instance, McCormick (2004, p. 10) notes that:

‘‘Various events have conspired to thrust tax matters onto board agendas . . . But there is little evidence of overall taxstrategy; no well thought-through technically robust, philosophically coherent set of policies, principles andobjectives for a function that manages the disposal of a third of pre-tax profits’’.

Mulligan and Lamb (2004, p. 21) identify a gap in the existing tax planning literature, ‘‘namely, an understanding of howbusinesses create, formulate and administer their tax plans’’. Yancey and Cravens (1998) contend that international taxplanning is a critical component of business strategy which requires attention from managers of all functional areas in thefirm. However, there is little empirical evidence on how strategic decisions and tax decisions are inter-related (Glaister &Frecknall-Hughes, 2008) or on how executives approach tax decisions, and in particular how such decision making isinfluenced by ethical considerations (Doyle, Frecknall-Hughes, & Glaister, 2009). It is where one national tax jurisdictioninterfaces with another that both genuine problems arise for firms operating in more than one jurisdiction as well asopportunities for them to use tax arbitrage by ‘playing’ one tax system off against another to avoid tax. For example, incomederived from royalties, for instance, may not be taxable at all in one country, but could be taxed by another at its highestapplicable rates. It makes economic sense to locate the royalty income in the lower tax country. Often opportunities havearisen for firms to use transfer pricing or income shifting mechanisms in conjunction with low tax regimes to maximiseincome/profits (Hansen, Crosser, & Laufer, 1992). These and other such practices carry overtones of ethical dubiety, largelybecause of the tone adopted by tax authorities (see Wyman, 1997, on that adopted in the UK).

Firms frequently employ tax advisers (Glaister & Frecknall-Hughes, 2008). The involvement of tax advisers in this areaadds a further ethical dimension. Often professional tax advice is required to navigate through genuinely ambiguous taxlegislation (Frecknall-Hughes & Moizer, 2004; Hume, Larkins, & Iyer, 1999) or cross-border transactions. However, advisersmay adopt a different stance from their clients, which may be more or less ethical in terms of how aggressively they pursuetax avoidance strategies (Milliron, 1988) or market particular schemes to clients (Doyle et al., 2009). This may createdilemmas for clients who will not wish to see damage to their reputation as a result of vilification in the press for engaging intax practices which attract criticism and which may attract the attention of tax authorities (Doyle et al., 2009). There is anissue as to exactly what professional advice should be offered in order to reduce the tax paid. While this may deter firms fromadopting very aggressive tax avoidance measures, it may also deter them needlessly from acting in a perfectly legitimatemanner to reduce their tax bill. There is an implicit suggestion that ethics in taxation may somehow involve abstaining frompermitted legal ways and means to reduce tax and voluntarily going ‘beyond the law’ to apply some higher (undefined)ethical standards.

The above discussion leads us to posit a number of research questions:

(1) W

hat importance do UK and Turkish firms place on adhering to legal regulations in their respective jurisdictions? (2) W hat importance do UK and Turkish firms place on adhering to inherent moral standards not specifically covered by

law?

(3) W hat do firms do if (1) and (2) conflict? (4) W hat importance do UK and Turkish firms place on challenging the law? (5) W hat importance do UK and Turkish firms place on the impact of (1) to (4) on their corporate reputation?

M. Demirbag et al. / International Business Review 22 (2013) 100–111104

The paper first examines these research questions for the UK and Turkey independently and then seeks to makecomparisons between the UK and Turkey. The latter is undertaken by way of a binomial logistic model, which seeks to

explain the extent to which the relative importance of taxation related ethical concerns varies between Turkish and the UKfirms.

3. Research methods

3.1. Sample

The research questions are addressed by examining data obtained from a self-administered questionnaire completed byUK respondents and Turkish respondents. The development of the questionnaire was guided by the literature review,consultation with experts and feedback from personal interviews with seven UK tax specialists. A semi-structuredquestionnaire was used for the interviews, and interviewees were allowed to enlarge on topics. Tax avoidance and currentcorporate and tax authority attitudes to it featured largely in all interviews in relation to ethics. The literature reviewprovided the context and background for this study and general issues that would be relevant in the context of corporate taxethics. However, as noted above, there is no work specifically on companies in this area, so the detailed questions used in thequestionnaire were derived from the circumstances of the interviewees’ companies and the responses of the intervieweesthemselves.

To operationalise and make the five general research questions outlined above specific to corporate bodies, companyrespondents were asked to rank on a Likert scale of 1–5 (where 1 = not important and 5 = very important) how important thefollowing 11 considerations were in their organisation’s tax decision making process:

1. O

beying the law 2. U sing loopholes in the law 3. S tretching the law so as to obey its word but not its spirit 4. V oluntarily adhering to some higher moral standard than the law 5. B eing able to defend publicly what the organisation has done 6. N ot participating in tax avoidance schemes likely to be challenged by the Inland Revenue 7. A ctively participating in tax avoidance schemes to define better ill-defined law 8. E mploying aggressive tax advisers 9. D oing the same as other companies in the same industry

10. L

obbying the government for tax law changes 11. U sing corporate size/strength/reputation to obtain special deals from UK/Turkey/overseas governments

The UK data comprise quantitative responses from the tax practitioners working in 145 UK firms. To obtain the UK data,we used the Hemscott Company Guru database as a sampling frame. The Hemscott Company Guru database containsfinancial data for 300,000 of the largest UK established firms, including both private and public enterprises. The databaseprovides detailed information on directors, share prices, trades, information on organisational management and the activitystatus of firms. The Hemscott database uses multiple sources to obtain information, for example, records on publicenterprises are obtained from the Alternative Investment Market at the London Stock Exchange, while data on private firmswith an annual turnover of £1 million or current assets over £250,000 are collected from Experian Ltd. Both public limitedcompanies and private enterprises were incorporated in the sampling frame. Each record showed the company address,name of the Chief Executive Officer (CEO) and/or Chief Financial Officer (CFO) and telephone numbers. This selectionprocedure generated a total of 1000 firms and constituted the UK sampling frame for the study.

A total of 1000 questionnaires was mailed out. To ensure good quality replies and to enhance the response rate, weidentified the most senior and knowledgeable informants to whom the questionnaire was addressed. To encourageparticipation in the survey and to provide motivation for accurate responses, the respondents were guaranteed anonymityand were promised a summary report of research findings if requested.

A total of 165 questionnaires was returned, of which 145 were usable (the remaining 20 were excluded owing to missingdata), constituting an effective response rate of 14.5%. This is a relatively good response rate given the well-documenteddifficulties of obtaining questionnaire responses from an industrial population, especially where the focus of the study is ontaxation (Al-Eranyi, Alam, & Akhter, 1990; Borkowski, 1997; Cravens, 1997). Our questionnaire response rate is comparablewith other research efforts in taxation conducted in an industrial/commercial context.

The sampling frame for the Turkish firms was drawn from the website of TOBB (The Union of Chambers of Commerce,Industry, Maritime Trade and Commodity Exchanges of Turkey at http://www.tobb.org.tr), which provides an IndustrialDatabase that contains approximately 40,000 firms that are registered with any of 10 Chambers of Industry, 19 Chambers ofTrade and 64 Chambers of Industry and Trade in Turkey. The names and addresses of these companies are available from thewebsites of these chambers, which are linked to the website of TOBB. Within this sample frame, many very small companiesof fewer than 100 employees were excluded. This was not viewed as a serious threat to the study as many such companiesare likely to be managed entrepreneurially and so have no recognisable tax planning system. Through a random samplingselection procedure, a total of 1000 firms was generated and constituted the Turkish sampling frame for the study.

Table 1

Characteristics of respondent firms.

Characteristic UK firms Turkish firms

Number % Number %

Organisational type

Public limited companya 88 60.7 39 20.6

Otherb 57 39.3 150 79.4

Industry sector

Services 84 57.9 43 22.8

Non-services 61 42.1 146 77.2

Engaged in FDIc

Yes 101 69.7 31 16.4

No 44 30.3 158 83.6

Uses external tax advisers

Yes 144 99.3 129 68.3

No 1 0.07 60 31.7

Number of employees

Mean 7120 430

N 145 189a ‘Public limited company’ denotes that the company shares were publicly traded on a stock exchange.b ‘Other’ indicates companies the shares of which were not publicly traded.c ‘FDI’: ‘foreign direct investment’, denoting whether the firm had invested in real assets outside its home jurisdiction.

M. Demirbag et al. / International Business Review 22 (2013) 100–111 105

The survey questionnaire was mailed to the CEO of each company with a letter requesting that the CEO, or his/her seniorexecutive in charge of taxation related issues within the organisation, should complete it. After one reminder, a total of 204questionnaires was returned, of which 189 were usable (the remaining 25 were excluded owing to missing data),representing an effective response rate of 18.9%, which was satisfactory, given the confidentiality and complexity of thequestionnaire. The respondent companies were also compared across the main characteristics of the sampling frame such asindustry type and geographical location and showed no systematic differences (p > 0.1).

The characteristics of the UK and Turkish sample firms are shown in Table 1.It is clear from Table 1 that the firms from Turkey and the UK represent very different types of businesses. The UK firms are

larger (based on mean number of employees), less likely to be service businesses, more likely to be public limited companies,and more likely to engage in FDI. In order to remove any doubts that may stem from the differences in the composition of thetwo samples, we compared the responses provided to the relative importance of the ethical issues for each group of samplefirms with respect to the following sample characteristics: organisational type (public limited company vs. other), industrysector (services vs. non-services), engaged in FDI (yes vs. no) and firm size (SME vs. large size). No significant differences(p > 0.1) were found for the mean scores of each group of sample firms across the sample characteristics. We then pooleddata from the two samples to establish a larger data set in seeking answers to the study’s main research questions.

3.2. Model specification

Owing to the nature of the dependent variable, a binary logistic regression was used, which estimates the probability ofan event occurring. The binary logistic model can be expressed as:

PðYi ¼ 1Þ ¼ 1

½1 þ expð�a � XiBÞ�

where Yi is the dependent variable, defined by a dummy variable either 1 or 0. The value of 1 denotes the probability of anevent occurring rather than another as shown by the value of 0. Xi is the vector of independent variables for ith observation, a

is the intercept parameter and B is the vector of the regression parameters (Amemiya, 1981). The regression coefficientsestimate the impact of the independent variables on the probability of an event that occurs. A positive sign for the coefficientmeans that the variable increases the probability of the event occurring, while a negative sign signifies the opposite. Themaximum likelihood estimates of the parameters were obtained employing logistic regression. The explanatory power ofthe model is assessed using the model chi-square statistics, which test the null hypotheses that all parameter coefficients arezero, except the intercept term. Large chi-square values and small p values indicate good fit. The predictive ability of themodel can be determined by the correct classification rate, which shows the percentage reduction in classification errors withrespect to random selection. However, to identify an acceptable level of predictive accuracy, the obtained classification ratehas to be compared with the rate that would have been obtained by chance. In the case of unequal group sizes, the standardto calculate this rate should be proportional chance criterion. The formula for this criterion is: a2 + (1 � a)2, where a is theproportion of cases in group 1 and 1 � a is the proportion of cases in group 2. For a rough estimate of the acceptable level ofpredictive accuracy, Hair, Anderson, Tatham, and Black (1995, p. 204) suggest that the classification rate should be at leastone-fourth greater than the proportional chance criterion.

Table 2

A comparison of taxation related ethical issues between UK firms and Turkish firms.

UK firms Turkish firms

Rank Mean S.D. Rank Mean S.D. t-value

Obeying the law 1 4.82 0.38 1 4.51 0.86 4.82***

Being able to defend publicly what the organisation has done 2 4.21 0.94 2 4.03 1.44 1.36

Not participating in tax avoidance schemes likely to be challenged by

the Inland Revenue

3 3.24 1.19 4 3.51 1.66 �1.69*

Using loopholes in the law 4 2.98 0.98 7 2.46 1.40 3.95***

Doing the same as other companies in the same industry 5 2.82 1.17 6 2.72 1.41 0.71

Stretching the law so as to obey its word but not its spirit 6 2.43 0.93 8 2.45 1.48 �0.17

Voluntarily adhering to some higher moral standard than the law 7 2.39 1.05 3 3.66 1.51 �9.01***

Lobbying the government for tax law changes 8 2.32 1.30 11 2.15 1.42 0.27

Employing aggressive tax advisers 9 2.03 0.94 5 3.35 1.51 �9.74***

Using corporate size/strength/reputation to obtain special deals from government 10 1.90 1.14 10 2.26 1.31 �2.59**

Actively participating in tax avoidance schemes to define better ill-defined law 11 1.73 0.87 9 2.32 1.46 �4.53***

The mean is an average on a scale of 1 = not important to 5 = very important.

S.D.: standard deviation.

* p < 0.1.

** p < 0.05.

*** p < 0.01.

M. Demirbag et al. / International Business Review 22 (2013) 100–111106

4. Findings and discussion

Before examining the regression results it is instructive to consider the relative importance of the ethical issues for eachgroup of country respondents. The relative importance of the ethical issues is shown in rank order in Table 2.

For both UK and Turkish firms ‘obeying the law’ and ‘being able to defend publicly what the organisation has done’ are thetwo most important ethical issues, each with a mean score above four (on a five point scale). It may be noted, however, that‘obeying the law’ has a statistically higher mean (p < 0.01) for UK respondents compared with Turkish respondents.

In general, the ranking by means is relatively consistent between the two country groups, except it is noticeable that‘using loopholes in the tax law’ is ranked higher for UK firms than Turkish firms (with a statistically significant difference inmeans (p < 0.05)). Also, ‘voluntarily adhering to some higher moral standard than the law’ and ‘employing aggressive taxadvisers’ are ranked higher for Turkish firms than UK firms (with a statistically significant difference in means (p < 0.05)).Both ‘using corporate size/strength/reputation to obtain special deals from government’ and ‘actively participating in taxavoidance schemes to define better ill-defined law’ have a low rank for both groups of respondents, although there is asignificant difference in means (p < 0.10 and p < 0.05, respectively) with, in each case, the mean being higher for the Turkishfirms.

It is apparent from Table 2 that both UK firms and Turkish firms stress the importance of conforming to the law, of beingable to justify in a public manner the tax actions they have taken, and not participating in schemes likely to be challenged bythe tax authorities. This indicates that both groups of firms are very conscious of appearing to behave in a publiclyappropriate manner with respect to tax matters. On the whole Turkish firms appear to be more passive than UK firms interms of seeking to influence the law relating to tax, while Turkish firms appear more active in being prepared to employaggressive tax advisers. This may be a feature of the differences between the samples of UK and Turkish firms, with fewerTurkish firms being public companies and therefore having less economic influence, and a feature of them operating in a lessdeveloped legal environment.

To investigate these findings more stringently we now turn to the regression analysis. Prior to running the binomiallogistic regression, a correlation matrix of the variables was prepared. Table 3 shows that the pairwise correlations were notlarge enough to warrant concern about possible multicollinearity problems.

Table 4 shows the results of the logistic regression where the UK firms were taken as the base and given a zero value. Thebinomial logistic model explains the extent to which the relative importance of taxation related ethical concerns variesbetween Turkish and the UK firms. The model has a high overall explanatory power with a significant chi-square value(p < 0.01). Table 4 also shows that the model has a good correct classification rate (84%) that is well above the base line rate.Both the specificity (the ability to correctly predict the UK firms) at 84% and sensitivity of the model (the ability correctly topredict Turkish firms) at 83%, are excellent. Pseudo R-square measures confirm that the model has relatively goodexplanatory power.

From the full set of 11 taxation-related ethical concerns, eight have significant coefficients. Of these variables, four havenegative coefficients which include ‘obeying the law’ (p < 0.01), ‘using loopholes in the law’ (p < 0.01), ‘doing the same asother companies in the same industry’ (p < 0.1) and ‘lobbying the government for tax law changes’ (p < 0.05). These findingsreveal that these four ethical issues are relatively more important for the UK firms than for Turkish firms.

Two of these findings concerns imply a high degree of conformity – ‘obeying the law’ and ‘doing the same as othercompanies in the same industry’. For UK firms there may be greater corporate social responsibility pressures to be seen to bebehaving appropriately. The risk of poor publicity arising from public knowledge of not conforming in these ways may be

Table 3

Descriptive statistics and correlations among variables.

Variable names Variable description Mean S.D. 1 2 3 4 5 6 7 8 9 10 11

1. TAX_ETH1 Obeying the law 4.65 0.71 1

2. TAX_ETH2 Using loopholes in the law 2.69 1.26 �0.13 1

3. TAX_ETH3 Stretching the law so as to obey its word but not its spirit 2.44 1.27 �0.18 0.46* 1

4. TAX_ETH4 Voluntarily adhering to some higher moral standard than the law 3.10 1.46 �0.05 �0.01 0.08 1

5. TAX_ETH5 Being able to defend publicly what the organization has done 4.11 1.25 0.19 0.13 0.07 0.31* 1

6. TAX_ETH6 Not participating in tax avoidance schemes likely to be challenged

by the Revenue authorities

3.39 1.47 0.04 0.00 0.08 0.21* 0.32* 1

7. TAX_ETH7 Actively participating in tax avoidance schemes to define better

ill-defined law

2.06 1.27 �0.22* 0.31 0.35 0.28 0.14 0.17 1

8. TAX_ETH8 Employing aggressive tax advisers 2.77 1.44 �0.12 0.11 0.19 0.32* 0.08 0.12 0.40* 1

9. TAX_ETH9 Doing the same as other companies in the same industry 2.76 1.31 �0.11 0.29* 0.23* 0.21* 0.19 0.09 0.35* 0.25* 1

10. TAX_ETH10 Lobbying the government for tax law changes 2.22 1.37 �0.12 0.34* 0.26* 0.11 0.20* 0.20* 0.36* 0.24* 0.38* 1

11. TAX_ETH11 Using corporate size/strength/reputation to obtain special deals

from government

2.09 1.24 �0.18 0.28* 0.14 0.10 �0.01 0.05 0.36* 0.27* 0.26* 0.48* 1

S.D.: standard deviation.

N = 334.

* p< 0.001 (two-tailed test).

M.

Dem

irba

g et

al.

/ In

terna

tion

al

Bu

siness

Rev

iew 2

2 (2

01

3)

10

0–

11

1

10

7

Table 4

Results of logistic regression.

Variable name Dependent variable

UK firms vs. Turkish firms (0 = UK firms; 1 = Turkish firms)

Definition Coefficient Wald statistic

TAX_ETH1 Obeying the law �1.18*** 13.65

TAX_ETH2 Using loopholes in the law �0.80*** 15.81

TAX_ETH3 Stretching the law so as to obey its word but not its spirit �0.03 0.02

TAX_ETH4 Voluntarily adhering to some higher moral standard than the law 0.91*** 38.94

TAX_ETH5 Being able to defend publicly what the organisation has done �0.23 1.54

TAX_ETH6 Not participating in tax avoidance schemes likely to be challenged

by the Revenue authorities

0.04 0.11

TAX_ETH7 Actively participating in tax avoidance schemes to define better

ill-defined law

0.53*** 7.22

TAX_ETH8 Employing aggressive tax advisers 1.05*** 34.85

TAX_ETH9 Doing the same as other companies in the same industry �0.28* 2.72

TAX_ETH10 Lobbying the government for tax law changes �0.45** 5.69

TAX_ETH11 Using corporate size/strength/reputation to obtain special deals

from government

0.33* 3.06

Intercept 3.37** 3.86

Model chi-square 205.85***

N 334

Turkish firms 189

UK firms 145

Sensitivity 0.83

Specificity 0.84

Correct ratio 0.84

Prop’al chance criterion 0.51

Cox & Snell R sq. 0.48

Nagelkerke R sq. 0.64

*p < 0.1; **p < 0.05; ***p < 0.01 (two-tailed test).

Positive signs indicate the relative importance of taxation related ethical concerns for Turkish firms, while negative signs indicate their relative importance

for UK firms.

M. Demirbag et al. / International Business Review 22 (2013) 100–111108

greater for UK firms than for Turkish firms. The pressure to conform to particular industry practices will lead to a high degreeof isomorphism, which may inhibit particular companies from acting in a contrary manner, as this may put at risk theirreputations if most of the other firms in the industry seek publicly to discredit the actions taken. Such reputational effectsmay be more important to the public profile of UK firms than they are to Turkish firms. Also, there may be less well-organisedcollective industry working in Turkey.

Paradoxically, however, two of the concerns involve issues of not conforming – ‘using loopholes in the law’ and ‘lobbyingthe government for tax law changes’ – both of which are more important to UK tax practitioners. More sophisticated andreadily available tax expertise in the UK than in Turkey may facilitate the former. Given the acceptance of a better establishedlobbying system in the UK than Turkey, this may lead to the perception in the UK that lobbying is worthwhile and may lead tofavourable change compared with attitudes in Turkey.

The four variables that have positive and significant coefficients are as follows: ‘voluntarily adhering to some highermoral standard than the law’ (p < 0.01), ‘actively participating in tax avoidance schemes to define better ill-defined law’(p < 0.01), ‘employing aggressive tax advisers’ (p < 0.01) and ‘using corporate size/strength/reputation to obtain specialdeals from government’ (p < 0.1). These findings suggest that these four ethical issues appear to be relatively more importantfor Turkish firms than UK firms.

The finding that voluntary adherence to moral standards other than the law is viewed more importantly by Turkish firmsthan the UK firms is not surprising. Since tax related legislation is highly complex, and since historically Turkish tax laws areknown to have many loopholes (World Bank, 2008), voluntary adherence to higher moral standards emerges as moreimportant than legislation. However, active participation in tax avoidance schemes is generally known to be common inTurkey, which is caused by detailed exemptions and incentive schemes, particularly in priority development regions andareas of strategic importance.

The finding that employing aggressive tax advisers is considered more seriously by Turkish firms than UK firms is also notsurprising. In Turkey large industrial conglomerates and several large and medium sized firms tend to employ retired orformer tax inspectors who are well networked with bureaucrats, inspectors and experts in the Ministry of Finance and theTreasury. As these professionals have detailed knowledge of the system and its loopholes, they also use the sameterminology which provides them with some obvious advantages in exploiting ill-defined tax laws in Turkey.

Lobbying the government for tax law changes is also viewed more importantly by UK firms than Turkish firms. Lobbyingthe government is, however, a well-known practice in Turkey, carried out particularly by large conglomerates or industrialgroups, though it is not ranked as highly as in the UK in Table 2. Investments in developing regions of Turkey are encouraged

M. Demirbag et al. / International Business Review 22 (2013) 100–111 109

by tax breaks and exemptions (such as national insurance exemptions and energy related exemptions) which motivate largescale firms to lobby the government to obtain special deals. These industrial groups also enjoy media advantages, as most ofthem operate in media and financial services.

No significant variation is found between Turkish and UK firms with respect to the relative importance of the followingthree taxation related ethical issues: ‘stretching the law so as to obey its word but not its spirit’, ‘being able to defend publiclywhat the organisation has done’ and ‘not participating in tax avoidance schemes likely to be challenged by the taxauthorities’. The possible reason for these findings is that these activities are related. Stretching the law, being unable todefend publicly the organisation’s activities and participating in dubious tax schemes are all likely to attract unwelcomeattention from the media and/or tax authorities, with resultant adverse effects on corporate reputation and/or taxinvestigation (at best) or legal action (at worst).

5. Conclusions

This study presents findings on responses to a set of ethical issues relating to taxation from tax practitioners employed inUK firms and Turkish firms. The paper therefore makes a significant contribution to the academic literature in obtaining andanalysing data from tax professionals to provide a cross-national study. Fundamentally important to both groups ofpractitioners is obeying the law on taxation and being able to defend publicly what the organisation has done. As postulatedin the study’s basic research questions, however, we have discovered differences in perceptions between the two countrygroups. Our underlying assumption is that these differences arise from the economic structural differences between the twogroups of tax practitioners and the different level of sophistication in tax law. An understanding of these issues is importantbecause the operation of the legislation relating to taxation has to be understood and accepted by the affected parties, andimportantly, governments have to be able to raise the required levels of tax revenue without significantly alienating majorstakeholder groups, including the business community. Greater insight into how ethical views on taxation arise and differbetween countries may be used to enhance the credibility and effectiveness of the tax regimes involved and enhances effortsat international tax harmonisation.

We have drawn on the prior literature and interviews to derive a set of ethical issues relating to taxation. Further researchcan explore these individual issues in more detail but could also usefully identify other areas of ethical concern not exploredhere. For Western economies tax ethics is explicitly dominated by the issue of tax avoidance, but it is unclear whether this isas explicit in dominating tax ethics in emerging markets. It would be beneficial in future research to identify what this keyissue is.

A limitation of the study is that the findings may not be generalisable, given that perceptions were investigated in onlytwo countries, although these are used as proxies for developed and emerging economies. Future studies could usefullyexamine other country combinations in order to explore whether there are sets of differences common to those identified inthis study. Comparing another advanced market economy and another emergent market economy would be useful inhelping to generalise the findings, but broader studies investigating similarities and differences between groups of countrieswould be particularly valuable in generating a deeper insight on ethics and taxation.

As our study considers corporate bodies, it would be very difficult to find a way of evaluating corporate tax morale, and,indeed, culture, as we can only seek the views of individuals who own and/or manage firms. While a company is a legalperson, it cannot take any actions itself, and cannot express opinions independently of the people who run it. It wouldtherefore be very difficult to attempt to assess corporate tax morale, or indeed, corporate culture. Thus we have notattempted to do this, since the focus of the study is on how firms deal with and apply tax law as it affects the corporate body.

Possible consequences of seeking company data from employees/managers are that they will give their own personalview and/or will give the responses that they think are to the company’s advantage or are socially desirable. However, this isa potential problem for all studies which seek company data via employees/managers, not this one alone. We feel, however,that this was precluded to a large degree here by seeking out the most senior and knowledgeable informants in targetcompanies, who would be accustomed to represent their companies and, given the guarantee of anonymity and non-attribution of responses that was provided, honestly provide truthful company data.

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