Does innovation capacity reduce tax evasion? Moderating effect of intellectual property rights

•Innovation capacity and intellectual property rights are two significant mechanisms in alleviating tax evasion.•Protecting intellectual property rights is a significant moderator between innovation capacity and tax evasion.•The moderation effect is not homogeneous for all levels of innovation capacity.•The Granger causality test confirmed the bidirectional relationship between innovation capacity and tax evasion.•The results also hold for two sub-samples, namely developed and developing countries. The purpose of this study is two-fold: (i) investigate the association between innovation capacity and tax evasion; (ii) examine the moderating effect of intellectual property rights (IPR) on innovation capacity and tax evasion. Thus, the study provides policy guidance to reduce tax evasion. We collected data for 139 countries from several sources and merged them for the common period (2006–2015). The analytical tool (i.e., the linear mixed model methodology) enabled us to examine the topic under time-varying analysis. The fundamental results show that innovation capacity and IPR may be two significant mechanisms in alleviating tax evasion. We also found that IPR is a significant moderator between innovation capacity and tax evasion. However, this moderating effect is not homogeneous for all levels of innovation capacity—the moderating effect reduces and increases tax evasion at lower and higher levels, respectively. The Granger causality test confirmed the bidirectional relationship between innovation capacity and tax evasion. The robustness of the results was further confirmed by constructing two sub-samples—developed and developing countries. Finally, implications are suggested for policymaking to alleviate tax evasion behavior.