How Do Boards of Directors and Audit Committees Relate to Corporate Tax Avoidance

Abstract

I illuminate and test two seemingly divergent views on the role of the board of directors in corporate tax planning. The traditional view suggests effective boards protect shareholders by engaging in extensive tax planning as long as tax planning investment benefits outweigh tax planning costs. The recently advanced agency view suggests aggressive tax planning facilitates managerial rent diversion and is likely to be associated with ineffective board monitoring. Studying the boards and tax policies of a sample of Fortune firms between 2001 and 2005, I find evidence that is mostly in line with the former view. Notwithstanding differences in tax aggressiveness, I find little evidence to suggest that board and audit committee characteristics have an impact on long-run effective tax rates, consistent with efficient tax planning, on average, by large US corporations.