Abstract:
We study the impact of tax preparers on corporate tax optimization in South Africa. The analysis draws on the population of corporate income tax returns linked to data on tax preparer use. Consistent with tax code complexity and frictions in the take-up of tax advantages, we document that firms' reported taxable income and tax payments decline significantly when they start utilizing tax preparer services. Additional analyses provide direct evidence that the use of a tax preparer increases the take-up of legal tax benefits: eligible firms become more likely to seek access to a regime with special low tax rates; they are more likely to claim an employment tax incentive (ETI) for young workers and to run losses (which can be offset against future profits). Our findings, on the one hand, imply that tax adviser services are instrumental in reducing frictions in corporate income taxation. In the context of the ETI, they increase the effectiveness of the tax incentive in stimulating the employment of young workers. On the other hand, tax preparers are shown to drive a wedge between the tax costs of firms that do and do not rely on their services, which may be a source of inefficiency and inequities.