We investigate whether firms in close customer–supplier relationships are better able to identify and implement tax avoidance strategies via supply chains. Consistent with our prediction, we find that both principal customers and their dependent suppliers avoid more taxes than other firms. Further analysis suggests that principal customers and dependent suppliers likely engage in tax strategies involving shifting profits to tax haven subsidiaries. Moreover, tax benefits appear to explain both principal customer firms’ and dependent supplier firms’ organizational decisions. Overall, our study provides evidence of the importance of tax avoidance as a source of gains from these relationships.

We investigate systematic changes in corporate effective tax rates over the past 25 years and find that effective tax rates have decreased significantly. Contrary to conventional wisdom, the decline in effective tax rates is not concentrated in multinational firms; effective tax rates have declined at approximately the same rate for both multinational and domestic firms. Moreover, within multinational firms, both foreign and domestic effective rates have decreased. Finally, changes in firm characteristics and declining foreign statutory tax rates explain little of the overall decrease in effective rates.