The obligation to pay income tax in advance is found in several countries around the world. Importantly, advance tax payments have been a significant component of the tax system, particularly in relation to income derived from business operations. In Greece, the concept of advance payment of tax has become a significant area of debate between businessmen and policymakers. Under the current tax regime, businesses are required to estimate and pay taxes based on expected profits for the upcoming financial year, meaning they must pay taxes in advance even before actual profits are realized. In cases where a company incurs a loss instead of a profit, there is a provision for offsetting, allowing businesses to adjust future tax liabilities. This system has raised concerns about its impact on business behavior and decision-making, particularly regarding tax planning.

A crucial question is whether the advance tax payment mechanism incentivizes firms to adopt more aggressive tax practices to reduce their liabilities, ultimately leading to greater tax avoidance.  According to the literature, the implications of prepayments on tax avoidance are complex and often contradictory. On one hand, making advanced tax payments can enhance compliance by stabilizing tax liabilities and minimizing fluctuations (Siahaan, 2023). Conversely, such prepayments may intensify financial pressures, potentially leading to diminished compliance in specific situations (Haonan, 2020.)

To address the aforementioned research question, we use the universe of corporate tax returns of Greek firms matched with financial data from ICAP, for the years 1999-2018.  The identification strategy is based on a tax law introduced by the Greek government in 2005, aimed at supporting the viability  of newly established firms. This policy reduced the advance payment rate by 50% for all new businesses during their initial three years of operation. By analyzing the complete population of newly established, we investigate whether there is a significant variation in taxable income between the third and fourth years of operation, thereby enabling us to evaluate potential changes in tax behavior as the preferential tax incentives conclude. To investigate the reactions of firms affected by the advance tax reform, we use Panel Event Study approach. Through this method we are allowed to isolate the causal impact of the reform by comparing firms just above and below the threshold where the policy change occurs. We can also monitor the behaviour of firms over time. Our  preliminary results provide statistically significant evidence to support the hypothesized relationship. The findings offer important insights regarding the potential effects of advance tax measures. This study's implications reach beyond the context of Greece, enhancing our comprehension of how analogous tax policies may affect business compliance and tax behavior in various economies. Such a wider viewpoint enriches the global discourse on the formulation and efficacy of tax reforms intended to enhance corporate tax compliance.

Keywords: Tax Prepayments; Corporate Compliance; Firm Behavior; Greek Tax System

JEL classification: H25, H26, H32, M21