Impact of internal governance mechanisms on tax aggressiveness: evidence from French firms listed on the CAC 40

Abstract

PurposeThis study aims to analyze the relationship between a firm’s use of aggressive tax planning and board of directors (independence and size) and audit committee characteristics (independence and expertise).Design/methodology/approachThis study used archival data from 35 non-financial firms’ French firms listed on the CAC 40 over a period of 5 years (2013–2018).FindingsThis study shows that measures of board size are negatively related to tax aggressiveness. A broader board helps reduce tax aggressiveness, as having more members can improve board performance. Indeed, more members can contribute to a better assessment of tax risks and detect risky tax strategies.Research limitations/implicationsThe main limitation of this study is the small sample. The authors limited the observations to 2018 because the corporate tax rate in France changed in 2019. Such a time window casts homogeneity on the current study. Examining universal registration documents, it has been noted that companies have only recently become interested in disclosure of tax risk.Practical implicationsKnowing the characteristics of the board and audit committees can give a signal to stakeholders about the potential risk bearing on aggressive tax planning. This study provides evidence that could help the board governance committees integrate the right profiles and to raise awareness among the members of the board of directors and the audit committee to play their role (monitoring function or advisory function) about tax risk management.Originality/valueAccording to the authors’ knowledge, this study is the first to provide empirical evidence regarding the effect of the board of directors and audit committee characteristics on tax aggressiveness.