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Difference Between the Real and Estimated Size of a Company: A Potential Cause of Tax Evasion

Difference Between the Real and Estimated Size of a Company: A Potential Cause of Tax Evasion

Gerardo Reyes Ruiz (Centro de Estudios Superiores Navales (CESNAV), Mexico)
Copyright: © 2023 |Pages: 32
DOI: 10.4018/979-8-3693-1190-5.ch016
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Abstract

Small and medium-sized enterprises (SMEs) hold a crucial role in modern economies, contributing significantly to wealth generation and job creation. This study aims to explore the correlation between specific financial ratios and construct a synthetic measure to understand the business size of selected Catalan SMEs. Using discriminant analysis, the methodology calculates and explains company size, considering synthetic dimensions generated through principal components analysis with a set of financial ratios as input variables. By utilizing this information, the study precisely explains the “size” classification variable, detecting discrepancies between reported and actual company sizes to address potential tax evasion. The valuation of the classification process determines the necessary adjustments between real and estimated sizes, providing valuable insights into the business sizes of analyzed Catalan SMEs.
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Background

Since 2004, SMEs have been responsible for over 65.4% of employment in EU member countries, 69% in non-EU member countries, 61.9% in Asia, 55.43% in North America, and 66.9% in Latin America (Castelleti, 2005). These percentages have been on the rise, underscoring the undeniable importance of these companies in supporting more than half of the economically active population worldwide. Understanding and striving for excellence in SMEs is crucial not only for their own success but also for the prosperity of the countries they operate in (OECD, 2018).

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