Customer-Supplier Relationships and Corporate Tax Avoidance

We find that close customer-supplier relationships facilitate tax avoidance by both principal customers and their dependent suppliers. Further analysis suggests that principal customer firms engage in a tax strategy involving centralized procurement by tax haven subsidiaries. Moreover, tax benefits appear to explain principal customer firms’ supply chain organization decisions. Finally, we show that close customer-supplier relationships promote the diffusion of tax avoidance knowledge from principal customers, who tend to be relatively large and sophisticated, to their dependent suppliers, who tend to be smaller and less sophisticated. Overall, our study provides evidence of the importance of tax avoidance as a source of gains from these relationships.