As a result, the firm enjoyed higher revenues than peers. Mafia firms enjoy lower costs, as they can procure goods and services at favourable prices, and induce wage compression through tax evasion, nonpayment of overtime, and denial of trade union rights. They acquire property and equipment at a discount, and have access to illicit funds, freeing them from the costs of credit. A 2015 police action in Emilia Romagna showed a construction firm connected to the Mafia won public contracts by quoting lower prices thanks to its noncompliance with Italian labour laws. Mafia firms can also impose higher procurement costs on peers. One 2018 anti-Mafia action revealed how a restaurant connected with the Mafia bought wine from a Mafia-owned winery in Southern Italy. The restaurant started to force peers to buy wine from the same winery, at inflated prices. If there is an increase in the cost of doing business for competitors, then one of the easiest expenses to reduce is tax. Businesses can take advantage of ‘grey areas’ within tax legislation to avoid paying taxes. TAX AVOIDANCE The benefits of tax avoidance are wellknown. It increases after-tax profit and cash flow, while reducing liabilities. Most companies choose a level of tax avoidance where the marginal benefits outweigh the marginal costs. Tax avoidance is not tax evasion – it is not in itself illegal, you can just be more or less aggressive in how you pursue it. But does the presence of Mafia firms lead peer firms to avoid more tax? We examined whether the removal of mafia-affiliated firms causes changes in peer firm tax avoidance activity. Italy is the only country with a law specifically defining association with firms infiltrated by Mafia organisations (Article 416bis of the Penal Code), and Anti-Mafia police actions curtail the influence of organised crime on the environment in which peer firms operate, potentially reducing the cost of doing business. In some areas of Italy, the Mafia is so pervasive it is difficult to distinguish between Mafia firms and non-Mafia firms. Therefore, we focus on Northern and Central Italy between 2005 and 2016, where the presence is less widespread, and the impacts of a Mafia firm’s removal are more clearly observable. Across 120 anti-Mafia police actions curtailing organised crime involving 1,567 individuals and 650 Mafiainfiltrated firms, we found the action not only led to a reduction in the cost of doing business, but also a reduction in peer firm tax avoidance behaviour. Specifically, the GAAP effective tax rate – the ratio of tax expense to pretax income – increases by 1.02% relative to firms not affected by the Mafia firm’s presence. If this was applied across all companies in the regions, it would imply an additional 4.24bn Euros of taxes would be due to the Italian government in 2016 – equivalent to 0.23% of Italian GDP. Why does this happen? There are two possible explanations. Firstly, as mentioned above the presence of Mafia firms hurts other firms in the industry and increases incentives to avoid taxes. As this is risky, when the Mafia firms are removed, tax avoidance is reduced. Secondly, police action increases perceptions of monitoring in an industry, motivating firms to reduce activities which might be subject to regulatory penalties. We find evidence in line with the first explanation. Specifically, the effect of police actions on peer firm tax avoidance arises only when police actions target Mafia firms, and we do not find a stronger effect when police actions are undertaken by the Guardia di Finanza – the police force tasked with prosecuting financial crimes. This evidence suggests that the removal of the Mafia firm as opposed to the perception of increased tax enforcement drives our results. A BRIGHTER TOMORROW Following the removal of a Mafia firm, peers increase their profitability and operating performance, see a reduction in the costs of raw materials, and are incentivised to invest more in property, plant and equipment. Even those who do not increase their investments reduce their tax avoidance. The effects do not occur immediately, since the benefits of the removal of the Mafia firms manifest themselves a few years after the police action, but they are there. Crime hampers economic growth in the areas and industries in which it operates, its removal has benefits for businesses at an individual level and the country as a whole through increased tax revenues. The same effects would still apply outside of Italy. The only difference is that in Italy the law helps us to identify if a firm has been infiltrated by the mafia. FIFTY FOUR DEGREES | 35 Dr Justin Chircop is a Senior Lecturer in the Department of Accounting and Finance. This article is based on the paper Anti-Mafia Police Actions, Criminal Firms, and Peer Firm Tax Avoidance, by Dr Justin Chircop, of Lancaster University Management School; and Associate Professor Michele Fabrizi, Patrizia Malaspina, and Professor Antonio Parbonetti, all of the University of Padova. It is published in the Journal of Accounting Research. j.chircop1@lancaster.ac.uk
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