Effects of Environmental Regulation on Corporates Tax Evasion

Abstract The extent of corporate tax evasion and underreporting globally is increasing and taking new dimensions. Multinational corporations are taking advantage of the certain tax system to evade tax across countries. Governments lose huge amounts of revenue from large corporation tax evasion behavior, it was estimated that countries lose about 4-10 percent of global corporate income tax revenues to corporate tax evasion, which could have been used for health care delivery, education, and infrastructural development. The objective of this study is to determine the corporate tax evasion variables. The quantitative research approach was employed, a survey was used to collect the data from 312 oil and gas companies, SPSS and PLS-SEM were used to analyze the data. By expanding the economic deterrence theory with the economic theory of regulation, the results show that tax rate, detection probability, and penalty have a positive and significant relationship with corporate tax evasion. The result further revealed that environmental regulation has a positive and significant relationship with corporate tax evasion. The result of this study implied that tax rate, detection probability, penalty, and environmental regulation are the determinants of corporate tax evasion. This paper extends economic deterrence theory with economic theory of regulation, through environmental regulation as a predictor variable. The finding provides novel knowledge in taxation domain by integrating the two theories from different disciplines. Fundamentally, the effect of environmental regulation on corporate tax evasion is new in the literature, hence, it will serve as the foundation and basis for reference in future research. Therefore, policymakers globally, should design appropriate tax penalty systems, establish robust detection mechanisms, restructure the tax rate, and formulate friendly environmental regulations to reduce the level of corporate tax evasion among large and multinational companies across the globe. JEL E6; E7; E70; E71